What to do with that tax refund?
This time of year, many companies are trying to persuade you to spend your tax refund on their product or service. Before rushing to the car dealership, furniture store or shopping center, take a moment to reflect on your financial situation.
Consider the following ideas for making the most of your tax refund.
- Use your tax refund to catch up on bills. If you have outstanding or past-due bills that are accruing interest and late fees, put your refund toward these first.
- Assess your overall debt and credit situation. How much money do you owe? If you have multiple accounts to choose from, choose the one with the highest interest rate to pay off first. Visit and experiment with the online calculators programmed to show you how to get out of debt. If you owe $3,000 at 17% and are making a payment of $50 per month, you can expect to pay off your debt in 135 months(11 years 4 months). Additionally, you will pay more than $3,750 in interest. If you dedicate $1,000 from your tax refund to reduce the debt, you’ll pay it off in 60 months (5 years) and will safe $2,750 in interest. This is assuming that you stop charging on the account and do not add to the balance.
- Save for a “rainy day.” This can help keep you out of debt when an emergency comes. And it is easy to do, since the IRS can deposit your refund directly into an account instead of issuing you a check. By filling out IRS Form 8888 you have the choice of directing your refund to one, two or three accounts such as checking, savings, and retirement accounts. All you have to do is to supply accurate account and routing numbers. Before setting up the direct deposit, you should check that the financial institution accepts direct deposits for the designated accounts. The split refund option is available whether taxpayers file electronically or by mail.
- Act as if the return never came into your hands by placing it in a savings account that will not be touched until there is an emergency.
- Use the refund to build a revolving savings fund for non-monthly expenses that come throughout the year. Examples include Christmas, car registration, school registration or tuition, back-to-school clothes, birthdays, summer vacation, etc. Use a portion of the tax return to get this fund going, and imagine how prepared you will feel when you need the money and it is available.
- Look at retirement funds and pension plans. There are many online calculators to estimate future funds needed for retirement. Place your tax return in a Roth IRA or open a new investment fund. Watch as your money grows, adding a nice cushion to your retirement savings.
- As a family, make or review family financial goals. These could include a family vacation, providing college education funds or buying/paying off a home. What goal could use a boost from the tax return? Making it a family effort teaches family members valuable lessons about goal setting and saving money. After determining your financial situation, make decisions that will most benefit your own financial goals and security.