(In this – the last in a four-part series about the wise use of your Federal Income Tax Refund – we discuss the value of an emergency fund. With the exception of the first post, the advice in this series applies to any windfall – lottery winnings, gifts, even yard sale proceeds.)
Let’s face it, the goal we all want is Financial Freedom – the freedom to stop being slave to your creditors, the freedom to go and do and be what you want. What sounds better than that? Nothing. Right? For many of us, though, we might as well be talking about climbing Mt. Everest. Alone. Barefoot. Blindfolded. In other words, too many people think Financial Freedom is impossible to achieve. What if I told you that’s not true? Keep reading, and you’ll see how realistic – and simple – it is to achieve.
In this series, we discussed what a Tax Refund is, and why you get one – simply, the government took too much of your money and they have to give some of it back. Then we discussed that you can get a guaranteed return by paying off/ paying down your debts – but not before you have an emergency fund. Most recently, we discussed what an emergency fund looks like, and what it is for. We also discussed that there are two types of emergency funds – the first $1,000 that you save before you get out of debt, then the 3+ months-worth of living expenses that you have in the bank for life’s big emergencies.
So, you’ve paid off your debts and you’ve got six months of living expenses in the bank. What do you do with your tax return now?
Now, my friend, is where the fun begins – you are on your way to Financial Freedom
What is Financial Freedom?
What is Financial Freedom? It is the pinnacle of your financial journey. When you reach Financial Freedom, you’ve reached the top of the mountain.
But, really, what does Financial Freedom look like? What is it?
That’s the fun part – it looks like whatever you want it to look like.
If you’ve followed the plan to this point, you’ve got as much as six months of your household expenses in the bank and you’ve paid off all your debts except for your house.
It’s an awesome feeling, isn’t it? So, what do you want to do with your Tax Refund now? That’s right, you get to choose – you have the Financial Freedom to choose what to do with your money, instead of having your creditors decide for you.
Well, that’s not really fair. Your creditors aren’t really the bad guys, are they? After all, you chose to take out the loans – it’s just tough to remember why it was so important to borrow the money in the first place.
It just feels like you don’t have a choice – and that’s why debt sucks.
Debt sucks because you chose immediate gratification (borrowing money to get what you wanted immediately) with delayed payoff (debt repayment) instead of choosing delayed gratification (saving for what you wanted until you could pay cash for it) with immediate payoff (having the cash).
That said, now that you have achieved Financial Freedom, you have choices – lots of choices. Let’s explore a few of them.
Payoff the Mortgage
Maybe, it’s time to work on paying off your house. With all your debts paid off, you’ve got a lot of excess cash each month to throw at the principal each month until your mortgage, too, is paid off. Calculate how long it will take you to pay off your mortgage at your new, larger payment – after applying your tax refund, of course.
If it’s going to take more than about two years, you may want to refinance, because any longer than a couple of years and you’re likely to lose your focus and find other uses for that extra money (i.e. you’ll end up spending it on other stuff). Right now, rates are still near historic lows, and you can get an awesome deal on a 10- or 15-year mortgage – just make sure to keep the payment at no more than 30% (ideally 25%, but with no other debt, you can probably hack 30%) of your take-home pay to keep from running into trouble in the future.
Take a moment to visualize what your life will be like with absolutely no debt.
Pretty sweet, huh. Keep focused. Keep putting all your excess funds toward your mortgage and you’ll be there in no time. That is the ultimate in Financial Freedom.
You’ve paid off your mortgage and need something to do with your Tax Refund (and all your excess cash each month), or maybe you’ve got a reasonable mortgage payment at a great rate – on a 10-15 year amortization, and you’re not really stressing about your mortgage payment. Why not invest your money and let it work for you.
There are so many options out there. What do you choose?
Well, it seems that angel investing is all the rage these days. What do you think about going out to find a startup, maybe one that is even pre-revenue? Don’t think it’s a good idea? Me either. (In case you’re not familiar, pre-revenue means the company isn’t earning any money yet.) There are plenty of investment opportunities out there with a lot less risk.
For example, at this writing (February 2016) the S&P 500 Stock index has returned 47% over the last 5 years and 50% over the last 10 years. Find a good investment advisor who can teach you about the investments that are best for you and your particular situation. Probably something like a well-diversified mutual fund with a long track record of success.
Many folks like to invest in real estate. Depending on your market, it might be a good choice for you. However, I have to caution you about how you go about it. Debt can be easy to come by, especially to someone with few obligations and a pile of cash for a down payment. While real estate can bring good returns – especially in the long run if the property appreciates – it can also be a soul-crushing pain in the you-know-what if you get the wrong tenants or are unable to get tenants.
If investing is the way you want to go, get more advice than is in this article. Find a good-quality advisor, one who is more interested in helping you succeed than making a sale.
Make the World a Better Place
What says Financial Freedom more than having the ability save, or improve lives? Take that tax return and write a big, fat check to the charity of your choice. Your local church would love to have that money to grow its missions program. You could establish a scholarship in your grandmother’s honor for your local high school. Depending on how much you have to give, you may be able to create an endowment at the college or university of your choice. Or, you could think beyond your local area and beyond all you may know.
Did you know that 663 million people in the world live without clean water? Organizations like Charity Water take your donations and turn them into wells of clean water in places where people are currently drinking stagnant water out of swamps. If education is more your thing, Pencils of Promise takes your donations and spends 100% of them on education. For $250 you can educate a student and for $25,000 you can build a school. If neither of these float your boat, that’s OK, these are just two of about a zillion worthwhile charities that would love to use your money to make the world a better place.
I don’t need to tell you about all the things you can buy for yourself and your loved ones with the money you have left after building your emergency fund and paying off your debts. I’m not foolish enough to think you haven’t been dreaming about that Rolex, or Porsche, or trip to Europe.
After all, what good is Financial Freedom is you’re not free to treat yourself?
Regardless of what you decide to do, please do something to celebrate your Financial Freedom. After all, you’ve earned it. You’ve reached the pinnacle of your financial journey. Enjoy the view from the top of the mountain.
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