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5 Things You Shouldn’t Do With Your Tax Refund

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Tax season is upon us, meaning a refund might be headed your way. No doubt you’re excited by the idea of a cash influx, but this isn’t free money. “Most people think their tax return is a gift from the government,” said Paula A. Norby Krueger, owner of Norby Krueger Tax & Bookkeeping Services in Wahpeton, N.D.

Of course, this isn’t true—tax refunds are granted because too much money was withheld from your paycheck, meaning you paid more in taxes than you actually owed. Getting some of this money back is a unique opportunity to further some of your financial goals. Here’s a look at good and bad ways to spend your refund check.

5 Things You Shouldn’t Do With Your Tax Refund

1. Make big purchases that require payments. Norby Krueger said it’s unwise to purchase anything with a payment because you’re just incurring new debt. The money from your tax refund might cover the first few payments, and you’ll be on the hook for the rest.

This category is broad, but could include furniture, electronics or even installing a swimming pool in your backyard. One of the most common offenders? Cars. According to Kelly Blue Book, the estimated average of a new car is $36,978, so while your tax refund may make a nice dent, it would be a mistake to ignore your future payments.

2. Splurge. “You’re starting to see retailers push promotions with online tax preparation companies that allow consumers to roll their refunds into gift cards,” said Chris Jackson, CFP and founder of Lionshare Partners, a Los Angeles-based, fee-only financial planning firm.

It can be tempting to spend your tax refund on an expensive handbag or a big-screen TV, but think twice about that. The government is essentially returning money you earned, so don’t waste your hard-earned cash.

3. Take a carryforward. A tax carryforward allows you to save your tax refund to pay any taxes you’d owe the following year. If you pay quarterly taxes, this may be a good idea. But for most Americans, it’s not the best use of the funds.

“Unless you are incapable of not spending your money, do not carryforward the tax refund into the new year,” Jackson said. “That is an interest-free loan to the government.”

“Instead, you should pay down debt, max out retirement plans or increase emergency funds,” he said.

4. Nothing. Allowing your tax refund to sit in your checking account might seem like a responsible move, but it’s actually unwise. If it’s just sitting there, you’ll likely be tempted to use it.

Even if you have seriously impressive self-restraint, Jackson said that cash is an asset class that can and should be managed. Take advantage of high-interest savings accounts or consider a short-term bond ladder — i.e., a bond portfolio composed of different maturities.

5. Make hasty investment decisions.“Investors have to first identify what their goals are in order to select appropriate investments that make up their overall asset allocation,” said Levi Sanchez, CFP and founder of Millennial Wealth, a Seattle-based fee-only virtual financial planning firm.

Whatever you do, don’t just get caught up in investment hype, especially if you’re just entering the market. Take the time to learn about strategies that are the best for your financial situation, and consider reaching out to a financial advisor for guidance. Sanchez advises investors who don’t want to actively manage their portfolios on a weekly or monthly basis to consider passive investment vehicles, like index funds and ETFs,  i.e., electronically traded funds.

10 Things You Should Do With Your Tax Refund

“If you receive a nice windfall of cash from your tax return, consider how it can impact your financial situation if you put it to good use,” Sanchez said. “Whether that’s paying down high-interest debt, saving for a home down payment or putting [it] toward long-term investments.”

Improve your financial situation by using your tax return for one of these good causes.

1. Save for retirement. If you’re not saving as much for retirement as you’d like — or aren’t at all — take this opportunity to pad your account. In an ideal world, you’ll have 25x your annual expenses in your retirement account when you retire.

“If you are maxing out your tax-deferred vehicles — 401k and HSA — then use those tax savings to invest in a Roth IRA,” Jackson said.

2. Contribute to a 529 plan. “A lot of consumers are ignoring their retirement in lieu of college funding when they can do both,” Jackson said. “They can fund their 401k and use the tax refund to fund a 529 plan.”

If you’re not familiar with 529 plans, these tax-advantaged educational savings tools allow you to put money aside for educational expenses. Two types of plans are available — prepaid tuition plans and education savings plans — and all fifty states and the District of Columbia sponsor at least one of these options, according to the U.S. Securities and Exchange Commission.

3. Start an emergency fund. According to a report from the Federal Reserve, 40% of Americans do not have enough cash on hand to cover a $400 unexpected expense. If you’re lacking an emergency fund, or if it isn’t equipped to handle six to 24 months of expenses, Jackson recommended using your tax refund to pad your savings. Being prepared for unexpected costs will bring you peace of mind and can keep you from going into debt.

4. Invest in yourself. “Your ability to convert human capital into financial capital is the key to economic freedom,” Jackson said.

He advised boosting your human capital by improving or acquiring new skill sets. For example, you might take an online course that will give you the credentials required for a promotion at work.

5. Pay off credit card debt. In 2018, Americans paid $110 billion in credit card interest and fees, according to a MagnifyMoney analysis of FDIC data through September 2018. If you’re in debt, this is an opportunity to pay it down or maybe even eliminate it.

And once you do, stick with it. “Make a commitment to yourself not to go back to using the credit card,” Norby Krueger said. “Get out of debt and stay there.”

6. Make home improvements. Fixing up your home in a manner that adds equity can be a sound investment, Norby Krueger advised. A few projects that add value to a home include updating the kitchen, finishing the basement and making the house more energy efficient, according to Consumer Reports.

7. Save for a down payment on a home. As recommended by Sanchez, putting your tax return toward a down payment on a home can be a wise investment in your future. If you’re buying your first home, your down payment can be as low as 3.5% of the purchase price with an FHA loan. Most lenders offer conventional loans starting at 5% of the purchase price, but private mortgage insurance is required when you put down less than 20%.

8. Opt for experiences over things. If you want to use your tax refund for something fun and your finances are in good shape (well-funded emergency fund, no credit card debt, on track for retirement) consider traveling instead of shopping. Experiences create memories that last a lifetime, while most objects have a shelf life. Just make sure your vacation doesn’t exceed your budget.

9. Make charitable donations. If you truly don’t need the money, consider donating all or part of your tax refund to a charitable cause close to your heart. As an added bonus, if your contribution meets IRS requirements and you can itemize your taxes, you might even be able to write it off as a deduction.

10. Make an extra mortgage payment. Own your home outright faster than planned by using your tax refund for an additional mortgage payment. Make sure the second payment is put toward your loan principal.

Receiving a check from the IRS is exciting, but don’t forget this is money you worked hard for. Wasting money never feels good, so think long and hard about the best possible use for your tax refund.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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We Downsized Our House So We Could Travel the World

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Purchase agreement for house

You’ve settled into your dream house and have called it home for years. But now you realize your family has more house than it actually needs, plus a large mortgage to match. Is it time to downsize?

The answer depends on what your financial and lifestyle goals are. Below, we share one story about a Florida-based family downsizing their home. Giving up 1,600 square feet allowed them to pay off their mortgage in a fraction of the time and achieve their goals of globe-trotting.

Keith and Nicole’s downsizing story

Keith and Nicole DeBickes loved their house in Delray Beach, Fla., but with more than 3,500 square feet of living space, it was perhaps larger than they actually needed at the time. “One day, I came to the realization that I had a 400-square-foot bathroom that I spent 20 minutes a day in, and we had this big formal dining room and formal living room that we never used,” Nicole said. “And we had a really big mortgage to cover it.”

She also wasn’t thrilled with the schools in the area — or with the idea of paying for private education. She and Keith knew they had to make a change.

The DeBickes (who work as an engineer manager and software engineer, respectively, and make between $100,000 and $200,000 combined annually) put their house on the market and started looking for a smaller home that was zoned for better schools.

They eventually settled on a 1,900-square-foot, four-bedroom house in Boca Raton. “We wanted to buy with the idea that we’d have a much smaller mortgage and we wouldn’t have to pay for private school,” Nicole said. “Then we could do things with our family like travel or retire earlier.”

The couple took out a 30-year mortgage for $110,000 in 2007, much smaller than what they had before. They then refinanced into a 15-year loan for $150,000 in 2009 to remodel their kitchen and upgrade their electrical work.

Pros and cons of downsizing your home

Deciding to downsize your house is a major decision that takes a good amount of effort and planning. Consider the following pros and cons before you choose to move forward.

Pros

  • Reduces your mortgage debt.
  • Potentially reduces other housing-related expenses, such as utilities.
  • Frees up cash to reduce or eliminate non-mortgage debt.
  • Gives you a smaller house to maintain.

Cons

  • Reduces your available square footage, giving you less space than you’re used to.
  • Unless you have enough equity to cover the purchase of your new home, you must qualify for a new mortgage.
  • You’ll have to sell your existing home.
  • You will have to shell out thousands of dollars for both your home sale and new home purchase.

Tips to pay off your mortgage more quickly

The DeBickes didn’t like the idea of having a mortgage on their downsized home. “We didn’t want to be working every month for a mortgage,” Nicole said. “We don’t like debt, and we wanted it to be gone.”

The couple buckled down and started making double and triple payments every month on their home loan. They drove older cars, carpooled to save on gas and maintenance and packed lunches to cut down on their food costs. The family took relatively modest vacations, staying with family or driving to the west coast of Florida.

All their diligence paid off — the DeBickles submitted their last mortgage payment in fall 2013.

If you’re on a mission to be mortgage-free sooner rather than later, here are tips to help you get there:

  • Make extra principal payments each month. Try rounding up your monthly mortgage payment. For example, if your payment is $1,325 every month, pay $1,400 instead or increase the amount by even more, if your budget allows. Be sure to communicate to your lender that you want the extra payments applied to your principal balance and not your interest.
  • Pay biweekly instead of monthly. Split your monthly mortgage payment into biweekly payments. Since there are 52 weeks in a year, you would make 26 half payments, or 13 full payments. Making one extra full payment each year could allow you to shave a few years off your mortgage term.
  • Consider recasting your mortgage. If you have at least $5,000 or $10,000 — depending on your lender’s requirements — you could use that lump sum to recast your mortgage. A mortgage recast allows you to lower your monthly payments by paying your lender a set amount of money to reduce your mortgage principal.
  • Dedicate windfalls to paying down your principal. Every time you get a tax refund, bonus or some other windfall, use it to pay down your outstanding loan balance.

Achieving financial freedom

Although they’re now mortgage-free, the DeBickes were still putting money away like crazy. They eventually quit their jobs (temporarily) and traveled abroad for two years with their boys, who were 10 and 7 in 2015. Without a mortgage payment, they were able to amass the $190,000 they thought they needed to travel for 28 months. “We have been living on one salary and saving or paying off the house with the other for 12 years,” Nicole said.

Despite their hefty savings goals, they’ve been able to take the boys to Europe and Costa Rica, too. “We want to really get them prepared for what travel is going to be like,” Nicole said.

The trip, which is outlined on the family’s website, FamilyWithLatitude.com, took the foursome everywhere from Ireland to France, among other spots. Nicole and Keith “road schooled” their children as they traveled, with the help of Florida’s virtual school program that allows them to take classes online.

They planned to rent their home while they were away, which will help finance part of the trip and cover some house expenses, such as insurance and property taxes. In the meantime, they are maxing out their 401(k)s and taking care of college funds for the boys.

“(In 2014) we were able to purchase the prepaid college plan for my youngest son in a lump sum,” said Nicole, who had already done the same thing for her eldest. “So I know that both boys have good college funds to take care of them.”

The bottom line

If you’re looking to move into a smaller home and save money in the process, it might make sense for you to downsize. Just be sure you’re clear on the benefits and drawbacks, and how the choice to cut down your square footage would align with your personal goals.

In the end, the lack of debt will allow the DeBickes the freedom to not only to travel the globe, but to hang out with the important people in their lives.

“With both of us working, we haven’t been able to spend as much time with the kids as we wanted,” Nicole said. “It’s a real luxury that we can do this. I’m looking forward to spending time together as a family.”

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Kate Ashford is a writer at MagnifyMoney. You can email Kate at [email protected]

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Study: Millennials Depend on the Bank of Mom and Dad

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Millennials are advancing steadily into middle age. But statistically speaking, America’s largest generation retains one characteristic of their youth: Widespread dependence on their parents to help pay the bills.

A new survey reveals that even millennials who think of themselves as independent on money matters still hit up their parents for regular, recurring expenses. Of those surveyed, 54% claimed they stood on their own two feet, but when pressed a further 30% of those admitted to leaning on their parents to help cover costs on everything from groceries to car insurance.

The costs being covered by parents

For the most part, millennials aren’t hitting up their parents for cash to cover extravagant, one-off charges like airfare for an Instagram-worthy vacation. Instead, the survey found millennials ask mom and dad for help making ends meet for living expenses, such as the phone bill, food and rent. For example, of the millennials who receive monthly help from their parents, 48% of respondents say the money helps cover the phone bill. A more detailed breakdown can be seen in the graph below:


Besides these day-to-day costs, emergency spending requires a call home for some millennials. About 15% of all survey respondents said they would need help from their parents to cover a sudden $1,000 expense. Instead, most would opt to use either cash or savings, provided those savings weren’t earmarked for retirement in a tax-advantaged account.

Millennial money worries

Dipping into your emergency fund to repair a hole in the ceiling is a good strategy (and a reason why you save), while making a withdrawal from your savings account to pay for a bottle of rosé is not. Unfortunately a staggering 70% of millennials surveyed admitted to using savings to cover non-emergency expenses.


To use a favorite phrase of millennials, “this is problematic.” A savings account can only be drawn upon six times a month via debit card or check (due to federal regulations) and you don’t want to waste one of your six free withdrawals to pay for a pint of Americone Dream. Even worse, the money spent on non-emergency expenses won’t be there when you need it to pay for an unexpected, urgent cost.

Another metric of financial health where millennials could stand to improve is retirement savings. While 58% of the millennials surveyed claimed to save money with either each paycheck or once a month, 44% don’t have any sort of retirement savings account — either a private one or through work.


To be fair, millennials aren’t exactly celebrating these personal finance failures. Approximately 57% said they regretted how they’ve spent money from their savings account, and a little over 36% said that during the past week, they felt anxiety about their finances every single day.

The numbers behind the stress

A significant financial worry on millennials’ minds is not having enough money. While we’re pretty sure everyone, regardless of age, would like to have more money, a recent study by the Federal Reserve underscores that millennials are particularly hard-strapped for cash.

Titled “Are Millennials Different?”, the report found when compared to members of Generation X and Baby Boomers when they were roughly the same age as today’s millennials, the millennials have less means to deal with their financial challenges.

As the authors of the report put it in the conclusion of the report, “We showed that millennials do have lower real incomes than members of earlier generations when they were at similar ages, and millennials also appear to have accumulated fewer assets. The comparisons for debt are somewhat mixed, but it seems fair to conclude that millennials have levels of real debt that are about the same as those of members of Generation X when they were young and more than those of the baby boomers.”

How can millennials do better?

Besides winning the lottery, what else can millennials do to improve their financial situation and rely less on their parents?

“Many millennials are skeptical of the market,” said Dallen Haws, a financial planner based in Arizona. “Although it’s good that they are not investing willy-nilly, it will be very important that they get comfortable with investing to be able to reach their full financial potential.” Read more on how millennials (and everyone else) can start investing with an eye toward retirement.

Millennials should also embrace the power of austerity. That doesn’t mean living like a monk, but it does mean thinking twice (or thrice) about making big-ticket purchases and whether or not they are affordable.

“Without question, the biggest regret amongst millennials I work with is overpaying for a car,” said Rick Vazza, a CFA/CFP based in San Diego. “Some of my most successful young members have happily continued holding on to inexpensive cars allowing them to funnel more money toward travel, retirement funds or a down payment.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
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James Ellis is a writer at MagnifyMoney. You can email James here

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