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Local KeyBank Manager Shares Advice on What to do With a Tax Refund

When faced with a tax refund – the average in 2013 was about $3,000 – it’s decision-making time.
 
While a trip to Hawaii is tempting, given the "liquid sunshine" we Washingtonians experience this time of year, there are other places to go with this money that will have longer-term benefits for your family’s budget — and happiness.
 
De-stressing somewhere tropical sounds so appealing this time of year. And, if you have the money budgeted for it, don’t have any debt, and have a good amount of savings for emergencies and retirement, go for it.
 
But most people aren’t in that enviable position.
 
So consider de-stressing at home instead. Studies show that one of the biggest causes of stress is money. The less control of your financial situation, the more stress you have. So, taking control of your finances is the best way to de-stress.
 
Some ideas that we offer our KeyBank clients to consider…
 
Deal With Your Debt
First, look at what kind of debt you have. Some debt is good debt — a mortgage, for instance — because the interest is tax deductible and the house is an investment.
 
However, if you have any credit card debt, you need to tackle that first. It may not be as fulfilling to put all (or most) of your refund towards credit card debt, but there is no investment that will make more money than paying down your credit card debt to save that interest.

If you don’t have credit card debt, but you do have college loans or car loans, look at paying those down.
 
Can’t handle the thought of using all of your refund towards debt? Make a plan to use 80% towards debt, put 10% into emergency savings and then use 10% on something fun. While you may not be able to go to the Hawaii with $290, you could enjoy a mini-vacation overnight in a luxury hotel.
 
A Penny Saved is a Penny Earned
Is your debt under control? Good for you! In that case, a tax refund is an excellent way to bump up your retirement savings. You could put your refund into a Roth IRA, which would allow your money to grow tax-free — and you would be able to withdraw it when you’re ready and not pay any taxes on it when you withdraw. It’s an excellent complement to a regular IRA or 401k where you invest money pre-tax but then pay taxes when you take them out.
 
If your retirement is well-funded and you have children, think about putting your tax refund into a college savings plan. If you have a 4-year-old child and place your $3,000 refund in a college savings account every year with 8% annual returns, you would have nearly $75,000 saved for college by the time you’re mailing high school graduation invitations.
 
Financial Planning Can Put a Vacation Within Reach
If you want help with your savings plan, it's a great idea to meet with a financial planner. Most banks have them, including KeyBank.

Financial planners help customers look at the entire financial picture —loans and mortgages, savings and investments — and create plans to make the most of family income. Maybe even save for that Hawaiian vacation — without incurring debt and the stress of paying it off.

PENNY TROTH manages the Woodinville branch. She can be reached at 425 381-4920 or penelope_e_troth@keybank.com.

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