With tax season upon us, this is a good opportunity to talk about the use of your tax return. Retailers are expecting taxpayers to purchase a bunch of big ticket items. Take my advice, don't do it. Here is what I propose if you are expecting a tax refund this year.
Donate 10% of your refund amount to a charitable organization
It is always a good idea to give to those who are less fortunate than us. The easiest way to do this is to select a charity you believe in and donate the 10%. Giving back makes you feel good and also provides another deduction during the current tax year.
Take one third of the remaining amount to apply against your outstanding debt
If you have any outstanding debt (i.e student loans, credit cards, mortgage, etc.) take a third to apply against it. Any extra amount that can be applied to your debt will help to retire it earlier. Remember you can't retire until you retire your debt.
Take the second third of the remaining amount and place it into a retirement account
This is a must, because that are so many Americans that haven't put enough money away for retirement. The problem is that many of them don't discover this until it is too late. In a recent report from Fidelity Investments, 55% of Americans don't have enough money saved to cover their basic needs in retirement. Let's start aggressively saving for retirement.
Take the last third of the remaining amount and save it for a rainy day fund
When you read the financial news and tune into financial broadcasts you will gather that rainy days are coming. In fact for some torrential rain is ahead. Because of this you should start or add to a rainy day fund. This fund is in place to cover your essential living expenses for three to six months, in case something happensthat causes your income to decrease.
The rainy day fund is different for an emergency fund. The emergency fund is for those items that jump "pop up" from time to time - car repair, leaky roof, etc.
I would use this same approach for any unexpected money that is received during the year also. Follow this approach and watch three things happen: (1) debt will be retired faster, retirement account will become healthy and your rainy day fund will provide the umbrella you and your family need to survive.