What is the best financial move to make with a large tax return?
Over the last 2 years, I received over $9,000 in tax refunds. This year, I expect the same. I am torn between paying off a $5,400 loan and saving the rest towards my emergency fund, which is only at 1-2 months of expenses. I am Active Duty and have great job security. The other option I have was to put 90% of my return into an ETF that pays monthly dividends, in hopes of gaining value and providing income to pay off the loan. What do you recommend?
Paying off the loan is usually the way to go. You'll no longer be paying interest and you'll not have the worry of a loan hanging over your head. If there's any left over, I'd save it towards the emergency fund.
When looking to improve your financial situation, you would be well advised to pay off debt first and add to your emergency fund. The latter should be sufficient to cover at least three months of expenses, and preferably six months even though you have great job security. I don't think the ETF option would be a worthwhile choice. An ETF with a generous yield would almost certainly be a fixed-income holding. In this time of rising interest rates, that would argue against the possibility of gaining significant value. Go with Plan A.
It really depends upon your other cash flow and especially the loan interest rate. If your loan interest rate is high, especially double digit, then pay it off first. Then save 3 months of emergency funds and invest the difference. That's my take.
Best of luck, Dan Stewart CFA®
First of all I want to thank you for your service. As far as what to do with a $9,000 refund, I think you should consider adjusting the amount of withholdings from your paycheck so you get more income (pay less taxes), rather than having the IRS hold onto your money with a guaranteed zero return during the course of the year. If you do that, your choices are different since you need to be disciplined to either save that money or speed up the debt reduction on your $5,400 loan. However, since you are looking for what to do now with the anticipated tax refund, your choices are as follows: 1.) since job security is not an issue, neither is the urgency to pay off the loan. 2.) If you do not have at least 6 months in an emergency fund, this should be a priority. After that is squared away, then 3.) investing would be the next logical step. Good luck.