DETERMINING YOUR REALISTIC NET WORTH
Before we get started on our strategy for maximize the use of our tax returns, let’s get a baseline understanding of net worth.
In a nutshell, your net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities). Assets include cash and investments, your home and other real estate, cars or anything else of value you own. www.thesimpledollar.com › Financial Wellness
Be what we are concerned with here is liquid assets aka cash. That means what you have in your savings / checking accounts, not your IRA or 401k. Also, we are not considering your available balances on your credit cards either, because that’s not your money, sorry! Take your available liquid funds and subtract your debts and liabilities excluding your mortgage. Just like that you can clearly see that what your realistic net worth and what you think your net worth is are severely different.
So with that established, let’s explore ways to utilize your tax return with the sole purpose of planning actionable items that bring you closer to a positive net worth.
 UPSIDE DOWN CAR LOANS
Upside down or “underwater on your auto loan is when what you currently owe on your principal balance is higher than the current value of the vehicle. In the case of a new car, you are immediately underwater the minute you drive off the lot. Imagine that some brands and models tank in value within the first 1-3 years down to 50% depreciation. Yikes!
Your best bet to float your way back up is to refinance your loan. Assuming your credit isn’t shot, shop around for a credit union that offers better interest rates. Lowering your payment without increasing the term period is the key here. DO NOT INCREASE THE TERM unless you are absolutely committed to paying off the debt early. You stand to save thousands overall, and possibly hundreds a month. Those extra dollars you are saving each month should be applied to the principal.
Take a portion of your tax return and apply it directly to the principal. Your first goal is to bring your principal balance as close as possible to 120% of the cars value. This effectively makes it worthwhile to lenders to offer you a refinance loan. If you are already there, then you are only applying enough money from your returns to bring your principal balance under the cars worth.
 DEROGATORY ACCOUNTS
Think of all the thing you would have the flexibility to do if your derogatory accounts were not weighing down your financial vehicle.
- Public records that prevent you from leasing an apt or home on your own without a cosigner
- Collections that prevent you from getting a home or auto loan if you needed it.
- Student loans and medical bills that don’t just disappear on day after 7 years of ignoring them
- vehicle repossessions & back child support payments etc
Part of making money is getting rid of debts and liabilities first. You stand to do so much better the very day you debts are cleared or brought under control. You may not need credit now, or ever want it, but its alway good to have. Why? Employers outside of the financial sector are now checking potential employees credit! Medical expenses may come up and exceed the limits of your insurance and HSA. Natural disasters happen and insurance companies may be slow to pay, just to name a few.
 HIGH INTEREST CREDIT CARDS
Wow, I wonder what the U.S. economy would look like if every single person paid off all of their high interest loans and credits cards. Interest rates on credit cards will always be high, that just the nature of the business. That doesn’t mean we have to give them our money so willingly.
Absolutely attack your outstanding credit card balances with accruing high interest. Balance transfer is king in the credit world. So many companies offer introductory rates at 0% for 12, or even 18 months in some cases. Please shop around, do your research, and read customer reviews of people who have owned the card for 6mo or more.
You may not immediately qualify for some balance transfers so spending some of that tax money to lower your balance in order to get approved is you first step. If you already qualify, just transfer your balance first then attack that principal with your tax money while under the introductory period. You will effectively be saving hundreds in interest of the same time span.
 DIVIDEND INVESTMENT ACCOUNTS
This is the equivalent of a money tree. How so? Stocks that pay dividends typically pay out quarterly. the month that they make their payouts varies from different companies. So, imagine that you have a set of stocks that pay a dividend January, April, July, October, and then another set that pays out February, May, August, November. You would be receiving a monthly payout on autopilot. Those payouts can be reinvested or “rolled” back into your account month after month. You really don’t have to lift a finger. Also there are cool services out there such a M1 Finance that make your portfolio match the same investment choices as Warren Buffet’s. In fact, we’ll do a review over this service soon so stick around.
 EDUCATION FOR A SKILL/TRADE
Going back to a school for a Masters degree that may cost you $60k for the opportunity to work in field that pays you $40K, is well, not very masterful. However, spending $500 -$1500 for a mentorship style training in a skill that you can immediately use to make money is a fantastic! I mean, come on, what are we talking about here, trading in a money for valuable and actionable education. Imagine your a coal miner, the mine closes, the whole town is out of a job, and you decide to invest a little money to learn how to be welder. You take up a lucrative welding job in the oil industry, or even open your own business. All because you used your money on knowledge rather than a cheap vacation that you decided on because your feeling down in the dumps. Bravo, to any effective education available.
Look, let’s be real. Spending your tax return on a used luxury car that will break down on you in 4 months is not the best use of your returns. This year is a great time to make those financial goals come into fruition. Take inventory of your pennys, your debts, your goals, and start hacking away at it. We can save ourselves from any financial woes if we stay focused on better spending!
What are you planning to spend you refund on?
Do you agree or disagree with any in the list?
Comment your experience below and any advice is appreciated.