With interest rates on savings accounts and Certificates of Deposit at practically zero, many Americans are opting to reduce their monthly income and pay more taxes up front in order to receive a larger tax refund. Nearly 80% of taxpayers get a refund, and the average amount for Individual Income Tax Returns is nearly $3,000. (Source: IRS Statistics)
Although it's no Powerball, allocating your tax refund toward both short and long-term goals can help you get ahead faster. Prior to becoming a mom, I worked in the financial industry for a large corporation. One financial adviser I knew recommended using a 40-30-20-10 allocation for tax refunds and bonuses at work to help me meet my financial goals, both short and long term.
- 40% for the coming year: Whether it's a new couch, ski passes for the family, or a scheduled summer vacation, many families will have a fairly large expense each year.
- 30% for emergency savings: Most financial experts recommend having six to nine months of income in an accessible savings account, in case of injury or job loss. If you don't have that much in savings, now's the time to start building that account.
- 20% for 1-5 years from now: Maybe you want to take a second honeymoon when the kids get a little bit older or you're planning to buy a new car and prefer to make a large down payment. Put this money away and make it difficult to access (lock it into a CD or deposit it into a savings account in another town).
- 10% for retirement: Hopefully you are already saving 10% of your income toward your retirement through a 401(K) at work or an Individual Retirement Account. Every additional penny you add will get you to retirement that much sooner. If you are under 50 years old, you can contribute up to $5,500 to a Roth or Traditional IRA for tax years 2017 and 2018. (Deposits for tax year 2017 must be made by April 17, 2018.)
Kimberly White Accounting, LLC provides outstanding service to their clients because of their dedication to the three underlying principles of professionalism, responsiveness, and quality. To schedule an appointment, please call (303) 791-5114 or email info@kimberlywhiteaccounting.com.
