The Broke Professional - Grow your money and yourself

4 Interest-ing Ways to Spend Your Tax Refund

My first and only job before joining the optical field was as a Starbucks barista.  It was hard work but I enjoyed it and learned a lot.  We had to manually and carefully load espresso into the machines back then.  No push button lattes!

My first year of income led to a nice refund at tax time.  I didn’t know anything about withholding rates.  Someone told me just put 1 on the W9 and you’re good to go.

And I got a bigger and bigger tax refund each year.  It was great!  I thought the government was so nice.

But after learning about the tax code, I realized I was just giving up my present income so the government could have some more money during the year.  I was giving them an interest free loan of a few thousand dollars every single year!

Now, I try to get my refund as close to zero as possible.  At the same time, I accordingly increase my savings and debt payoff contributions.  I’d rather have that money work for me throughout the year.

That being said, if you do receive a refund, you have to do something with the money.

Interesting Ways to Spend Your Refund

Here are 4 very interesting (and slightly questionable) ways to spend your tax refund:

1.  Buy an Apple Watch Space Black Stainless Steel Case with Space Black Link Bracelet.  Why spend hundreds of dollars on a run of the mill Apple Watch that tells the time and answers your phone?  Spend a thousand and now you can do the same with a space black link bracelet. ($1,099)

2.  Reserve the Tesla Model 3.  There is no car more coveted than the Tesla.  The Model 3 is a relatively affordable $35,000.  Put down the $1,000 reservation fee and figure out how to pay for it later when it arrives in 2018.

3.  Stay a few nights at a Trump Hotel.  Stay 3 nights at the Trump Hotel in Central Park.  Your friends will be so jealous.  It is the greatest, I mean absolutely the greatest most incredible hotel out there. ($1,500)

4.  Buy 50 shares of SNAP.  SNAP is the ticker symbol for Snap Inc. (very creative).  Snap is the parent company of Snapchat, which specializes in providing fun filters for our pictures.  It recently became a publicly traded company and is trading at $19.54 a share as of March 17, 2017.  Buy 50 shares and snap a picture of the confirmation email.  ($977)

While those are four pretty interesting ways to spend your tax refund, let me propose an alternative.  How about spend your tax refund on things that let interest work for you?  This will make your money go the extra mile.

Interest-ing Ways to Spend Your Refund

1.  Pay off your credit card debt.  The best thing to do when it comes to credit card debt is to avoid it.  The next best thing to do is to pay it off ASAP.  Credit cards charge extremely high interest rates.  The national average hovers around 15%, which is absurdly high.

This means that unless your investments are rocking and rolling and you’re getting a consistent 20%+ return year after year (which is nigh impossible), you need to get rid of that consumer debt FAST.  This will free up cash flow faster and save you a lot of money on interest payments.

2.  Increase your 401k contribution.  I like this suggestion.  I’m glad I thought of it.  The reason I like it is because it’s the most hands off and effective way to spend your refund.  If you already contribute to your 401k, just sign in to your account and increase your contribution percentage by a point or 2.  You will not miss the money trust me.

Once the tax refund hits your checking account, do nothing!  It’s as easy as that.  Your increased contribution rate will take that extra money throughout the year and get it invested.  You will save money on taxes and increase your retirement savings in one fell swoop.

3.  Fund a Roth IRA.  If you have maxed out your 401k, the next thing to focus on is your Roth IRA.  Combined with a pre tax 401k, the Roth IRA will allow you to withdraw money tax free, providing tax diversification for the future.  Because Donald Trump is the president so who knows what the future will bring?

The max contribution to a Roth IRA is $5,500 per year.  A tax refund of a thousand or so will get you almost 20% of the way there.  If you wish to max it out, you can set up automatic contributions for the rest of the year to get you there.

Another reason I like (love?) Roth IRA’s is that you can withdraw any contributions you’ve made to the account without penalty, as long as you’ve had the account for 5 years.  So it can serve as a quasi emergency fund if needed.

4.  Make an extra student loan or mortgage payment.  Depending on which of these debts has a higher interest rate, you can add rocket fuel to the payoff time with a nice lump sum payment.  Both of these debts can potentially give you some tax savings, so they’re not the WORST type of debt to have (see #1).

But debt is debt, and it should be paid off as soon as possible.  Just make sure to let your lender know that you want the payment to be applied to your principal amount ONLY.  Many lenders will pull a dirty trick of having it applied to interest first, which does nothing for you but everything for them.  Which is why it’s better to be debt free than continuing to do business with greedy banks!

Spend Your Refund Wisely

You can certainly spend your refund on the things on the first list.  It would make for a nice story and talking point.  But with all material things, the glamour fades very quickly.  And you’re right back to where you started financially.

Spend your refund on the second list, however, and you will provide a nice boost towards financial freedom.  In the end, that is truly what we’re all looking for.  Once you reach there, you can spend all the nights you wish at Trump Tower.

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Refinance Sooner Rather Than Later

This post contains affiliate links

Paying off student loans is a battle.  It’s a battle fought against multiple enemies while running a marathon.  Sounds difficult, but it takes consistent work and sacrifice for new professionals to become debt free.

In any battle, you need a good strategy and weapons.  Ideally, Matrix amount of weapons:

One weapon I should have used sooner is student loan refinancing.  In my case, it saved me a lot of money.  And if you have a nice chunk of student debt, it can save you a lot of money too.

How much?  Let’s take a look.

Simple case study

Let’s look at the case of a medical school graduate with a run of the mill $100,000 of student loan debt.  To keep things simple let’s assume this is one giant loan with an interest rate of 7% and a 25 year payoff.

And let’s also assume this particular graduate is a big spender and has no extra money to put towards student loan payments.  (I’m going to have a talk with him later about priorities)

With help from this handy student loan calculator, here’s how much this graduate will owe with these initial terms:

Original loan: $100,000

Interest rate: 7%

Minimum monthly payment: $706.78

Total interest paid: $112,033.35

This doc would have to pay a total of $212,033.35 on a $100,000 loan!  That’s one expensive education.  He would have to shell out over $700 every month for 25 years.  That does not sound like a good time.

Now let’s see how he would have fared if the student loan was refinanced at a lower rate of 4.5%, which is pretty average nowadays for a fixed rate according to SoFi:

Original loan: $100,000

Interest rate: 4.5%

Minimum monthly payment: $555.83

Total interest paid: $66,750.38

Through a simple student loan refinance, our doctor lowered his monthly payment by over $150 and reduced his total interest payments by more than $45,000!

Why in the world would anybody not want to take this deal????!!!!

Even if you’re eligible for a government program like income based repayment, these types of programs will almost always have you paying more in total interest payments.  I would much rather get my student loans refinanced to the lowest interest rate possible and then pay them off quick.

Very Easy Process

I graduated optometry school in 2009.  Doesn’t seem like a long time ago, but when it comes to student loan refinancing, it’s an eternity!  There were very few companies around and the process usually required physical paperwork.  Smartphones were not even a big deal back then so that should tell you something.

Today, there are so many companies that will refinance your student loans.  I continue to get emails and letters from these companies.  And many of these companies are very good.

There are two companies in particular who I feel are the best.  They are SoFi and Earnest.

I have personally refinanced student loans with both of these companies and they are listed #1 and #2 on the popular comparison website Magnify Money.

Refinancing with these companies is done completely online and is very streamlined and simple.  I walk you through the experience in a previous post here.  It’s easy enough to open an account and poke around just to see how easy the process really is.

Honestly, unless you’re getting total student loan forgiveness, there is no reason anyone with student debt should forgo the refinancing option.  It costs nothing to get some quotes and more likely than not, you will find an option to lower your interest rate.

Conclusion

Paying off student loans isn’t complicated.  Consolidate your loans if that makes sense from an interest rate point of view.  If not, pay off your highest interest rate loan with reckless abandon while paying the minimum payments on the rest.  Then move on to the next highest rate loan.  Rinse and repeat.

To make this easy process even more effective, refinance your high rate loans.  This will accelerate your loan payoff process and get you debt free even quicker.

Getting your student loans refinanced early in your career will provide the most bang for your buck.  This is the time your balance will be highest which means higher potential interest payments.

Being debt free requires resilience and consistency.  And a little help from others never hurt:

Check out your rate with SoFi.  You will receive a $100 bonus if approved for a refinance.

Also, check out Earnest.  You will receive a $200 bonus if you are approved for a student loan refinance.

My advice is to get a quote from both companies and see what the best deal would be.  Both companies use different underwriting methods so you don’t know what you can get unless you try!

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