It’s that time of year again. That time when Uncle Sam returns some of your hard-earned tax dollars that he’s been borrowing at zero-percent interest. Tax refunds are sort of a forced savings account for many people. And while I personally aim to avoid receiving a tax refund, there are some smart things to do with one once you receive it.

Kimberly Lankford, contributing editor at Kiplinger’s Personal Finance magazine, put together five smart uses for your tax refund. I’ve expanded on her ideas, and added eleven of my own to the list below.

Smart Things to Do With a Tax Refund

1. Pay off high-interest credit-card debt. Kimberly listed this one first, and for good reason. Eliminating credit card debt is one of the smartest ways to spend any windfall. The higher the interest rate on your debt, the bigger the payoff. Think about it; where else can you get a guaranteed return of 22% on your money?
2. Rebuild your emergency fund. Thanks to unemployment, underwater mortgages, and a general economic funk, many households have had to turn to emergency funds to weather the storm. It makes sense to allocate some or all of your tax refund towards covering future emergencies.
3. Boost your retirement savings. If your debts are paid, and you have plenty of money saved for emergencies, the next biggest bang for your refund buck is to invest in your retirement. Maybe that means funding a Roth IRA, if you are eligible. If not, drop the money in a savings account, increase contributions from your paycheck to your 401k plan, and use the savings to offset the difference.
4. Build your college savings. It’s tough to carve out retirement savings, college savings, and put a roof over your family’s head and food on the table. After all, there are only so many dollars to go around. Boost your kids’ college savings by opening a 529 college savings plan (here’s a look at the best 529 plans).
5. Help your kid save for the future. If you are the parent of a teenager that earns an income, did you know you can help them open a Roth IRA? No kidding. The only requirement is that your teen files a tax return. He or she can invest in a Roth IRA up to their earnings, or the maximum yearly contribution, whichever is smaller. So, if your daughter earned $1,800 last year babysitting, kept meticulous records and files a return, you could gift her $1,800 to invest in a Roth IRA. She’ll be well on her way to becoming a millionaire.
6. Start a side hustle. Ah, the infamous side hustle. Many of the world’s most successful entrepreneurial efforts were started on less than $1,000 (I started Frugal Dad on less than $50!). Use your tax refund to seed a business you’ve always dreamed of running.
7. Invest in a home improvement project. Lean towards projects that improve your home’s efficiency long term. For instance, installing a programmable thermostat and planting a few trees around your property will go a long way towards reducing your future monthly energy costs.
8. Open a “Car Replacement Fund.” Let’s face it; the car you are driving now will eventually die. Why not divert a little tax refund money to start a car replacement fund. If your current car is paid for, save what amounts to be a car payment in this account and when the time comes you can pay cash for your next car.
9. Build a square foot garden. Use a couple hundred dollars of your tax refund to purchase gardening supplies, soil, and seeds. Now’s a great time to plant, and soon you’ll be enjoying tomatoes right off the vine, instead of those shipped across the country in your grocer’s produce section.
10. Give it away. If you’ve been considering giving money to a charity, now is a great time. Donating your tax refund to a worthy cause can even help on next year’s taxes, as most charitable contributions are tax deductible.
11. Pay extra on your mortgage balance. We personally plan to pay off our mortgage early. Why? Because we value the freedom a debt-free lifestyle affords. Sure, we’ll miss a tax break or two, but I’d gladly end sending $14k to my mortgage company each year to save $3k on my taxes.
12. Get your will done. My wife and I recently updated our wills after a death in the family. Identifying guardians for your children, and disposition of your stuff in the event of your death is not fun, but it is absolutely necessary. If you have kids and do not have a will, stop everything, financially, until you have enough saved to visit an attorney and have one drawn up. It is that important.
13. Purchase a gym membership. Many gyms offer significant breaks for those that opt to pay one year in advance. My gym offered two free months and waived the registration fee if I agreed to pay for the full year, effectively shaving $90 off my annual gym costs. Be sure to check out the gym’s refund/cancellation policy before agreeing to such a long commitment.
14. Take a class. It doesn’t have to be an academic class, but it could be. Maybe you’d like to learn more about cooking, or self-defense, or real estate. Investing a little tax refund money in yourself can go a long way.
15. Go on a “paid-for” vacation. My family recently enjoyed our first cash vacation, and it was awesome! I didn’t have any bills to dread on the ride back home.
16. Create your own “car insurance savings account.” If you currently have a $250 or $500 deductible on your car insurance policy, consider raising it to $1,000 and parking $1,000 of your tax refund in a dedicated savings account. You’ll enjoy a permanent way to save money on car insurance premiums, and earn a little interest on your savings account.

If you’d like to avoid getting a large tax refund next spring, and instead get a boost to your take home pay now, check out the withholding tool at Kiplinger.com.

This is the second post in a series called Saving With Purpose: Living a More Intentional Financial Life. In this series, I plan to highlight a number of specific savings goals my family has identified we would like to achieve over the next few decades.

Before having kids, both my wife and I agreed we wanted to help our children with their education. My own experience struggling to finish school after taking on student loans, and then charging tuition and books to a credit card, strengthened my position. Like all parents, I wanted better for my own kids.

However, we also want to balance our desire for them to have it easier, our own retirement plan, and my wish for them to learn the value of hard work. One of the mistakes many parents make is that so overload college savings they hurt their own financial plans.

I’ve known parents who saved $200,000 dollars in mutual funds for their kids’ college education, but have zilch in their own retirement plans, a big mortgage payment left from their refinance, and a host of other debts. I will always advise to take care of your own financial plans first, and college savings second. After all, there are no scholarships for retirement.

Having said that, because we are maxing out our retirement plans (more on that in an upcoming post in the series), we hope to also fund our kids’ college needs – at least a large percentage of them. Unfortunately, we got a late start because we put off college savings while paying off our debts. The good news is that we have more to save without debt payments. The bad news it will take some hefty savings contributions to cover college expenses for our oldest, now 10 years-old.

Determining Future College Costs

Hope you are sitting down for this section. College costs are ridiculously expensive, and getting more expensive every year as the rate of tuition costs increases at a faster rate than inflation (between 5%-8% per year). Let’s run some numbers at the website CollegeBoard.com, which has a pretty good calculator.

Assumptions

• Annual college costs, in today’s dollars: $19,388 (4-year public, in-state)
• College cost inflation rate: 5%
• Expected years of attendance: 4
• Percent of costs you plan to cover from savings: 100%

The inputs above yield the following future college costs for both kids:

• Tuition costs per year in 8 years: $28,645
• Tuition costs per year in 13 years: $36,550

For those keeping score at home, that works out to $123,463 and $157,574 (keep in mind, tuition continues to inflate the four years they are in school) in college expenses for our kids. Ouch. Of course, this is sort of a “worst-case” scenario considering most parents don’t have to pay “full retail” for tuition at most schools.

There are a variety of college scholarships, grants, tuition reimbursement plans (if employed), etc. that can help defray some of the costs. But if you’ve learned anything about me from the site, I like to aim big, so let’s work with these numbers for now.

Accounting for the modest amount we currently have in 529 plans, and a 7% growth rate of the funds (which may be a tad optimistic given recent history), that same website suggests we increase our monthly 529 savings plan contributions to $715 a month for our oldest child ($512 for our youngest). Okay, so it looks like we’ll be cash flowing a good bit of her tuition if she doesn’t earn any scholarships, because saving that amount would be a stretch.

So what’s the lesson here? Start saving early! If my daughter was a newborn today, I’d only have to save about half of that monthly amount (roughly $450) to hit a target 18 years out. If I had only taken my own advice ten years ago.

This is the first post in a series called Saving With Purpose: Living a More Intentional Financial Life. In this series, I plan to highlight a number of specific savings goals my family has identified we would like to achieve over the next few decades.

We have all heard of SMART goals. You probably know the acronym by heart…Specific, Measurable, Achievable, etc. Identifying savings goals is no different. As I mentioned last week when first introducing this series, my family has been pretty good at saving money since getting out of debt. However, we find ourselves trying to pile up money for no specific reason, other than we recognize saving money is the smart thing to do.

This wasn’t enough for me. I want to set very specific savings goals and then track them to completion. When we accomplish the first savings goal, we’ll move to the second. When we accomplish that goal, we’ll move on to the next, and so on. Think of it as a “savings snowball.”

Of course, some goals will run concurrently, particularly the big, long-range goals such as retirement and college savings plans for the kids.

To kick things off, my wife and I sat down to identify our short-term savings goals. That is, things we hope to accomplish in the next year or two, or have already saved for, but don’t want to tap for competing priorities.

Short-Term Savings Goals

Goal 1: Save $25,000 Cash for Emergencies. Any financial planner will tell you this is the cornerstone of any solid savings plan. After all, rainy days are inevitable. Whether you are covering the costs of a new roof, a new transmission, or covering expenses during a layoff, the emergency fund is a must-have savings goal.

Most also agree that 3-6 months of expenses is a good starting place when determining how much one should save. For us, our goal amount is around eight months of expenses – we added two additional months since we are a one-income family.

Goal 2: Save $10,000 Cash in an Opportunity Fund. The problem with emergency funds is that they are only supposed to be used in an emergency. Life throws plenty of opportunities, too, and we want to be prepared for them. In our first 12 years of marriage, we had to pass on many opportunities because we were carrying debt and had little savings. We like to think of this fund as our personal line of credit – there to use and replenish as opportunities arise.

One real-life example of these types of opportunities is blogging conferences. Previously, the attendance fee, transportation and lodging made attending these types of events difficult. Now, if the right opportunity came along, I could attend such an event, which could lead to making valuable connections for building Frugal Dad.

Goal 3: Save $10,000 Cash Towards a Car Replacement Fund. Let’s face it; our cars won’t last forever. Their demise is inevitable, no matter how well we take care of them. So why not begin planning for their replacement now, rather than turning to banks or auto finance companies.

In our case, my truck will likely die first since it is several years older than our family vehicle, and has about 100,000 miles more on the engine. At current prices, I could buy a replacement truck for about $8,000 – $10.000. Accounting for a little inflation, with the hopes that my current truck lasts a few more years, and accounting for the remaining cash value of my current truck, that puts the replacement truck cash need at about $10,000.

Goal 4: Save $5,000 for Home Improvement Projects. Our house was built in 2004, so fortunately very little is in need of upgrading. However, there are a few small home improvement projects  we are interested in doing around the exterior of our home, such as installing gutters, paving a patio (or building a deck), and planting more mature trees on the property.

We’re also considering hardwood or laminate flooring in the kids’ rooms as they both suffer from allergies, and carpet seems to hold in the dust and pet dander making their symptoms worse. A few thousand dollars should cover these expenses, but we believe in saving the cash first before upgrading the home, even if other lines of credit are there.

I’m happy to report that Goal 1 is accomplished, and we are working on Goal 2 (the Opportunity Fund). We’ll save for goals 3 and 4 at the same time, with the hopes that our outside home improvement projects will be funded by late spring or early summer, and our new trees can be planted in the fall.

Stay Tuned

Next up in the series, we’ll take a look at college savings for our kids, our next big savings priority and something we know we are behind on. I’ve done some preliminary research for the costs of tuition for both kids, and the numbers are staggering. I’ll share the specific numbers with you, and our plan for reaching the goal in the next decade (even less time for our oldest – yikes!) just in case they don’t land full scholarships. Hey, a frugal dad can dream, can’t he?

In a recent post I reported that the Frugal family was nearly debt free. Well, we’ve crossed that pinnacle point, and are now enjoying life after debt. A comment from that post, and my initial experiences, have me wondering if life really is any easier after crossing over from being in debt to enjoying a life without it.

The first thing we did after reaching debt freedom was realign our financial goals. The first, of course, was to secure a fully-funded emergency fund, one that represented about six months of expenses. Admittedly, it was tough to keep up the same intensity towards saving money as we had for paying off debt. That brings me back to the thought-provoking comment left by Rob from PassionSaving.com. Here’s a portion of that comment that struck me:

If your experience is like mine, it won’t be all smooth sailing from this point forward. I say this not to be discouraging, but to point out what might be a basic reality of human life — it is a journey of ups and downs no matter how skilled one becomes at handling one’s money issues.

What I believe today is that accomplishing a big money goal like paying off one’s debt does not so much solve all your problems as open you up to a higher class of problems. The old problems truly are solved. But solving them provokes you into taking on new adventures, which lead to new problems. You will continue to find yourself frustrated and stuck and in pain and in fear in days to come.

My initial reaction? Yeah right! What could possibly be any more painful, financially, than going through the motions of paying off debt? What money struggles could we face that are even close to the struggles faced in the past? I suspect most people still deep in debt probably had that same reaction. But as I thought more about Rob’s comment, and began to experience life after debt, I understand his point.

Yes, we no longer have to contend with debt, but that doesn’t mean more daunting financial challenges aren’t ahead. My oldest child will soon be ten years old, which apart from terrifying me as a father, also serves as a wake-up call to get her college savings in order. Because we spent so many years toiling with debt and trying to get on solid footing, her college savings have suffered. The good news? Without debt we can afford larger contributions to her 529 plan, which should help us make up ground.

It’s a similar story for our own retirement plan. I diverted money we could have, and probably should have, used for retirement savings to pay down debt. Unfortunately, this means we missed a great opportunity to invest in our 20’s and let that money compound for a few decades. Are you reading 20-somethings? Make long-term savings a priority now!

In the final analysis, I would have to admit that yes, life is easier after debt. Paydays are now an exciting event because it means making more contributions to savings, rather than distributing most of your income to credit card and auto finance companies. But life after debt is not without challenges. And those challenges can conjure up the familiar fears and anxiety felt when looking at a pile of debt.

How will I even save enough to retire? How much will my kids need for college? Will I ever be able to save in taxable investments to chart a course to early retirement? I’ll approach these new challenges the same way I approached, and overcame, the ones related to debt. We’ll tackle them head on, and remain disciplined through the same frugal approach we take towards nearly all of life’s ups and downs.

My weekend financial project is to shore up the kids’ 529 plans. With my oldest child a mere eight years from starting college, and us dreadfully behind in accumulating savings, I have decided it is time to move college savings up the list of priorities a bit. Time to hunt down the best 529 plans available.

The first step will be to conduct a more thorough review of our current investment elections, including the 529 plan itself, and the investment elections within the plan. Like most people, we went with our in-state option since it was a decent plan according to most rankings, and we could benefit from a state tax deduction on contributions. However, after reviewing performance of the limited fund options I’m not so sure it is the best place to park the kids’ college savings funds, tax deduction or not.

Which States Have the Best 529 Plans?

Utah

According to a recent Morningstar article, The Best and Worst 529 College-Savings Plans, it would appear both Utah and Virginia offer solid plans. Morningstar’s write up about the Utah plan sounded the most appealing to me:

For those who want a tax-sheltered way to save for college using Vanguard index funds, this is the plan. Utah’s 529 plan has long been a favorite of ours and remains a strong choice for its low costs, flexibility, and tried-and-true Vanguard index funds. The plan’s fees are a rock-bottom 0.22% to 0.35%, making it one of the cheapest plans in the country.

Hard to go wrong with “rock-bottom” fees and Vanguard Index funds!

Virginia

Virginia offers two 529 options: a direct-sold plan managed by the state gives the flexibility to invest in a variety of different mutual fund companies, and an advisor-sold CollegeAmerica plan which offers a nice mix of American Funds with relatively low fees. From Morningstar’s review:

The state’s other topnotch choice, the advisor-sold CollegeAmerica plan, remains a favorite for its large selection of mostly first-rate American Fund mutual funds that give investors access to a broad array of asset classes, including emerging markets, small-cap foreign stocks, and foreign fixed-income securities. Fees are attractive, too, as most of the plan’s A-share options are below 1.00% in total annual fees.

It is still a good idea to check out your in-state 529 plan, because the ability to deduct your contributions, up to a certain amount, is very appealing. But don’t fall into the trap of investing in a bad plan for a tax deduction. Over the long term, you will come out further ahead by investing in a healthy plan out of state, if necessary.

A Word About Age-Based Allocations

Nearly all 529 college savings plans now offer various levels of age-based allocation, from the most aggressive to to very conservative. One problem with these types of plans, and any targeted-allocation fund for that matter, is that the person managing the fund may have a much different risk tolerance than you do. This could lead to funds being invested too heavily in higher-risk investments too close to college age. A sudden downturn, like the one we saw in the fall of 2008, could quickly pull the rug out from under college plans by decimating a 529 plan balance.

Parents, Secure Your Own Retirement First

I love my kids more than anything, but I also recognize that if I don’t manage to sock away $50,000 in a college fund for them, life goes on. They can work their way through school, like I did, and they can apply for financial aid, grants, scholarships, etc.

I’m not particularly fond of student loans, although some small amount of borrowing could make sense to supplement other funding options. And before all you student loan fans email me, let me just say that I’ve heard from too many 24 year-olds drowning in $75,000 of student loan debt to be persuaded to like them.

For Canadians, a plan similar to a 529 is an RESP (Registered Education Savings Plan). In basic terms, this is an account you can start for your child and make contributions to over the years; it’s a great way to save for post-secondary education in Canada. Be sure to look into this as an option.

As parents, our top priority should be taking care of our own financial futures so that we are not a burden on our children. Once we have paid down debts, built a solid emergency fund, and are contributing to our own retirement plans, then we can turn our attention to college savings. Remember, there are no scholarships for retirement.

Save for College with Upromise – College Dream Sweepstakes – Win $10k

My wife and I have been married for over eleven years now. When we first married we were complete opposites on all things financial. I am, by nature, a saver. My wife is the free spirit, or the spender, in our relationship. In an effort to keep things civil those first few years I spent a little more than I was used to, and she sacrificed a little more than she was used to.

We were convinced our compromise of financial personalities was for the greater good of marital harmony.  However, over the years our natural tendencies were overridden by circumstances – circumstances we created for ourselves, but had to work through nonetheless.

Just a couple years into our marriage my wife quit working as we decided she would stay home with our children. It was a decision we made together, and reflected both of our desire for her to be home until the kids were school age. Neither of us downshifted our spending appropriately for living on one income, and soon we found ourselves in debt. Our growing debt had an interesting effect on our relationship. My wife became a saver, and I sobered up (financially) after a couple years of spending more freely than I was comfortable with.

These days we are both enjoying a more frugal lifestyle. Just the other day my wife went grocery shopping and picked up $273 worth of groceries and cleaning supplies for $186. For hardcore couponers out there that might not sound like a huge savings. But for us it is huge! We both resisted using coupons for years, dabbling with services like The Grocery Game and other coupon websites only half-heartedly.

The reason we weren’t gung ho was because we weren’t both enthusiastic about couponing. I would clip, she would forget. She’d clip and give to me for my after-work run by the store, and I’d forget to use them at the checkout. But when we both got on the same page we started realizing some serious savings.

This same synergy developed through shopping with coupons has carried over into other areas of our financial life. We both decided we were tired of being in debt and have been paying it off like crazy the last several months. We are now equally passionate about building our savings, our kids’ college savings plan and our own retirement.

How much do you and your significant other differ on finances? Has this changed since you first met?

The stories are endless.  Joe and Sally saved their entire lives for their kid’s college education, but the recent market downturn has cut their college savings fund in half.  Now they are desperately searching for ways to fund college.  Often times this report is followed up by a tearful high school senior explaining their dream of attending an Ivy League school has been crushed.

I’m a father of two kids, and I know how it feels to want to give your kids everything.  But I honestly think parents are unnecessarily beating themselves up over these college fund balances.  Parents and college-bound kids are going to have to make some tough choices between now and next fall, and the toughest of those choices will be dealing with the financial reality that a large portion of their college funds are gone.

These days most families turn to student loans, particularly those who lost half the value of college savings in a matter of months.  Their story is a cautionary tale for those invested in risky investments too close to a financial goal, but since they all recognize that now there is no sense beating them over the head with portfolio allocation instructions.  No, we are where we are, and we have to figure out where to go from here. Because I generally dislike student loans, the following tips will intentionally leave Sallie Mae out of the mix.

Photo courtesy of StuSeeger

Seven Ways To Fund College Without A College Fund

1. Reconsider your choice of school.  I sound like the guy who doesn’t read his own articles.  I made the mistake of getting hung up on an out-of-state school because my best friend was going there, and I liked the football team, and it was my favorite college town.  Big mistake.  While I do have the ultimate souvenir from those days away at college (my wife), I also came home after 2 1/2 years with a pile of student loans and credit card debt.  After enrolling in a local university it was obvious the quality of education was just as good, and the tuition was considerably less.  Lesson learned.

2.  Ask for help from friends and family.  One of the more interesting concepts I have seen lately to formalize this process is a type of social investing market lead by Freshman Fund.  Students and parents tie the child’s Freshman Fund account to existing 529 college savings plans, and then share the student’s profile with family and friends.  Contributions are collected and deposited directly into the 529 plan behind the scenes (no need to share account numbers, etc. with extended family).

3.  Apply for every scholarship under the sun. I mean that quite literally. If I were a high school junior facing rising tuition costs and a small balance in my college savings fund I would make it my part time job to apply for as many scholarships as possible.  I would enter writing competitions, join various associations, and basically spend every free moment researching scholarship opportunities.  Even if you applied for 1,000 scholarships and 990 of them turned you down, there is a chance those remaining 10 could finance a year of school (or at least offset some of the costs of that first year).

4.  Get a part time job.  This one is a little controversial because some argue that part time work detracts from the college experience, or leads to lower grades. I started working my freshman year to cover books and miscellaneous expenses, and later worked even more hours to pay for an apartment and utilities. Admittedly, it was a drain, but I appreciated things far more than if my mom paid for everything.  I think it helps kids to have at least a little financial skin in the game.

5. Work full time for tuition reimbursement.  Many companies offer tuition reimbursement plans to their employees.  Start by researching companies in the field you are ultimately interested in studying. Most company websites offer a list of perks included in their benefits package, and if you have questions about tuition reimbursement eligibility contact the company’s human resources office (or recruiter) usually listed on the job search page.

6. Live at home and stay local, or commute a short distance. Room and board can add significant costs to already inflated tuition costs.  If you are short on cash you might be able to pull off tuition-only and stay and stay on the “Mom and Dad” meal plan. As a compromise, at least consider living at home your first year or two and then look for a reasonable off-campus option for the final years at school.

7. Take a year off to save up the cash. Again, not a popular option for most high school seniors eager to get started on college life. But families need to be realistic; if the money isn’t there it just isn’t there.  And with many people being laid off, or at least fearing they may be laid off, most parents are reluctant to try to cash flow tuition at an expensive school.  It might make sense to take a year off, work full time while living and home, and save every single dime you earn towards the next year’s tuition. I wish I had chosen this route – in fact, I ultimately did. I went to school right away for a couple years, returned home and worked for a couple years, and then wound up working my way through my remaining time at school.

Again, I want to stress to those parents and students out there who might be reading this that it is not healthy to play the blame game. Many parents are mad at themselves for not rolling funds into cash last year, and many students are equally mad at parents for losing so much of their college fund.  Being mad at yourself, or resentful towards your parents accomplishes nothing.  Now is the time to pull together as a family and work to find a solution that works best for everyone involved.

High school seniors, resist the temptation to take out huge student loans. I know the money is there, and you don’t have to pay it back for a few years, but you will have to pay it back.  When you graduate college you will be filled with the excitement of getting started in your career, and finding your first home. Don’t spoil it by tying a noose around your neck and hanging four years of student loans from it. Those loans will limit your options, and are often the gateway to other forms of debt such as credit cards and car loans. Make the sacrifices now so you don’t have to make them later.  I promise, ten years from now you won’t regret it.