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Each week, we answer money questions from around the web on the NerdWallet app. Here are three of the trending questions from April.
What should I do with my tax refund?
Getting a tax refund can feel like a bonus. So what should you do with it? The decision is up to you, but here are a few Nerdy priorities to weigh:
Consider bulking up any emergency savings. Financial experts generally recommend saving three to six months’ worth of expenses, but most of us fall short of that goal. A tax refund can be an opportunity to play catch-up.
Next, consider paying off high-interest debt, such as credit cards or personal loans. That can alleviate strain on your monthly budget.
If you’re all set with your emergency fund and don’t have any high-interest debt, then you might want to consider putting the money into a brokerage account to invest it.
Think about other pressing financial needs. Have you been waiting to undertake a needed home repair? Do you have an appliance you need to replace? Are you hoping to make a down payment on a new car? The tax refund could be your opportunity to purchase something essential you’ve been delaying.
Finally, save some of the refund for fun spending. Perhaps you’ve been putting off a night out, trip to your favorite restaurant or other little luxury. It’s hard to sustain a budget that excludes any fun, so consider the refund your chance to splurge responsibly.
If your refund was significant, you might want to adjust your withholding on your W-4 form so you receive more money in each paycheck (and avoid providing an interest-free loan to the government). This will reduce next year’s refund, but provide more money throughout the year.
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Do I really need an estate plan?
Estate planning may not be an exciting task, but it’s an essential one — especially if anyone relies on you financially.
Core estate planning documents — including a will, durable power of attorney and health care proxy — provide legal clarity at an already difficult time. They make it easier for your loved ones to manage your finances and make decisions on your behalf if you become incapacitated or die.
Without an estate plan, your assets could be in legal limbo, working their way through probate court. That can be a lengthy and costly process, depending on your state and the complexity of your assets. A will also allows you to name a guardian for minor children, rather than leaving that decision to a court.
Because few people enjoy thinking about death, it’s easy to put off estate planning. To get it done, put some time on your calendar to make a list of all your assets. Include bank and investment accounts, retirement plans, real estate, life insurance policies and valuable personal property.
You may also want to document items with sentimental value, to ensure family members understand their significance. Digital assets, like photo albums or social media accounts and passwords, can also be included.
From there, create a will and other estate documents. Websites like Trust & Will, LegalZoom and FreeWill offer guided tools at a lower cost. An estate planning attorney can provide more tailored advice — particularly if you have complex assets, own a business or have children.
Updating beneficiary designations is also important, because some accounts are distributed based on those designations.
The final step is getting the documents notarized, which may require a witness or witnesses. Completing the paperwork can be a hassle, but it ensures the documents are legally valid. Then, keep them somewhere safe. Be sure to review and update them regularly, especially if you experience a significant life event such as marriage, divorce or birth of a child.
One year later: Should I pay off debt or save?
We celebrated the first anniversary of our question of the week series this month by taking a look back at our most popular question.
One year ago, we answered the question: Should I pay off debt or save?
Our answer was that it’s best to do a little bit of both.
That answer still holds true today. Consumers are battling more economic headwinds: job market uncertainty, inflation fears and rising energy prices. With those financial strains, people can benefit from both emergency savings and lower debt payments.
Putting even a small amount of money into an emergency fund can be crucial.
Saving up a few hundred dollars can help you avoid racking up credit card debt in a pinch. Saving more than that can help protect you from a major car repair or job loss.
If your employer offers a match on retirement savings, then consider contributing enough to receive that match. Otherwise, you’re missing out on free money.
But you can still focus on debt, even while you’re saving.
If you’re carrying high-interest credit card debt, for example, paying it off as soon as possible can alleviate financial pressure.
You could apply the snowball method, where you pay off your smallest debts first, to build momentum. Or, try the avalanche method, where you pay off the debt with the highest interest rate first.
The bottom line? Paying off debt and saving are both top priorities, and both can increase your net worth.
