Home > Financial Updates, Investing > What to do with an extra $4,000?

What to do with an extra $4,000?

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So last week the lottery gave out a bunch of money ($500 million maybe?) and everyone was talking about what they’d do if they won.  Given that I’m much more likely to get hit by lighting, twice, I started thinking about events that are a little more certain… like my 2012 tax refund!

I’ve received all but 2 paychecks this year, so I can estimate pretty accurately how much I’ll be paid, how much will go to taxes, deductions, etc… In the past I’ve figured out how much I’ll pay myself with a spreadsheet, but it turns out TurboTax has a super easy online calculator.

Giving Uncle Sam a loan

Because I still haven’t figured out tax withholding, I paid the federal government too much in taxes this year.  Essentially, I gave them a loan with 0% interest… You’re welcome, Uncle Sam.

Hopefully in 2013, I won’t have this problem, but right now it seems like a good thing.  I’ll be receiving about $4,000 sometime in February, so I’d better plan ahead and have a plan for that cash infusion when it arrives.

If I had the typical American’s finances, I can tell you where I’d put my refund in this order.

  1. Consumer Debt
  2. Mortgage Principal
  3. Retirement Fund (401K, IRA)
  4. Index funds

But I don’t have the typical American’s finances.  I’ve got no debt, no mortgage, so I will most likely put it into my 2013 Roth IRA.

Doom and Gloom

Had I been earning that $333/mo throughout the year, I’d probably have just increased the amount that I buy index funds and dollar cost average it evenly.  So when should I get into the market?

Everywhere you look these days, you see one of two things.  Intense Christmas sales, or people screaming about how the FISCAL CLIFF is going to destroy everything.  I’m generally an optimist, so I think a deal will be reached before (but probably after) the deadline, and the cuts wont go into effect.

But what if America goes over the fiscal cliff, we fall into a recession, and all your worst nightmares come true?  Well first off, we’ll make it through just like we did last time, but more importantly, stocks will be cheap!  If things go south, I’ll use this opportunity to pour my $4,000 into a broadly diversified index fund.

If the fiscal cliff is avoided, then I’ll just dollar cost average the check from Uncle Sam.  SoI think I’ve got a pretty solid strategy either way.  No panicking here.

 

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