Are you expecting a tax refund check? If so, how are you going to spend it? Has a sunny beach complete with an umbrella drink crossed your mind? Has a shopping spree fit to rival that of Julia Roberts in “Pretty Woman” been lurking in your thoughts? Before you drop a chunk of cash on luxury items, stop and think.
The money in your tax refund isn’t exactly “extra” or “found” money. Think about it. Your tax refund check is actually your money – the government just held it for you for a while like some kind of bizarre savings account.
With that in mind, use your tax refund wisely. Refer to this list of the 10 smartest uses of your tax refund check and make sure high priority items are checked off before splurging on luxuries.
The Ten Smartest Uses For Your Tax Refund Check
1. Pay Down Debt – If you have outstanding debt in the form of credit cards, student loans, car payments, etc., put a significant amount of your tax refund check towards paying it off. Focus your attention on the loan with the highest interest rate first.
2. Build an Emergency Fund – Do you have enough money set aside to cover all your expenses for at least 6 months? What would you do if you suddenly lost your job? What would happen to your family if the primary bread winner was in a car accident and unable to work for a while? Is that the sound of crickets chirping? If you don’t have enough money saved up to cover your living expenses for a minimum of six months use your tax refund check to build up your emergency fund.
3. Assess Insurance Needs – Talk to your insurance provider to make sure you’re fully covered in case of emergencies. For example, life insurance is important especially if you have children, are heavily reliant on one person’s income, and do not have significant savings. There are many other types of insurance you may want to put your tax refund towards such as flood insurance, liability coverage, and personal umbrella coverage.
4. Plan for Retirement – It’s never too early to start saving for retirement; in fact, the earlier you start saving the better. Your tax refund check can give your retirement planning a much needed boost. There are a variety of retirement savings plans you an choose from, the most common being an employer’s 401k, Roth IRA, and traditional IRA.
5. Plan for College – College is expensive, so if you want to help pay for your kids’ higher education you may want to start saving early. Really early. Consider using your tax refund check to start Junior’s college fund now. One option to consider is a college savings plan like a 529 plan. There are several benefits to investing in 529 plans including the fact that they are low maintenance and offer federal and possibly state (depending on where you live) tax breaks. You could also prepay college tuition or contribute to an educational IRA.
6. Remodel – The largest asset for most families is their home. Investing your tax refund in upgrades and home improvement projects can be a smart move. You may want to consider consulting with a real estate agent to see which projects can add the most value to your home. In addition, consult with the county in which you live to see if you qualify for tax credits or abatements for your home improvements.
7. Invest – Whether you have a tax refund of $50 or $5,000, consider investing in a taxable account. With a $50 contribution you will be somewhat limited in your investment options, but that isn’t to say you can’t amass a sizable nest egg if you invest wisely. To find out about low cost investing options, go here.
8. Help Your Child Save Money – If your child (or children) has earned income, you can help him or her get a head start on a solid financial future by using your tax refund to fund a Roth IRA. This may motivate him or her to take an active interest in personal finances from an early age as well as to work even harder once he or she sees the money begin to grow.
9. Donate – If there is a charity that is near and dear to your heart, consider using your tax refund to make a generous donation.
10. Prepay for Your Vacation – Sure, that Disney vacation will be a blast but it’ll lose some of its luster once you get the credit card bill. Instead of racking up credit card debt, use your tax refund to pay off your trip before you leave so you can have a stress free time.
Okay, well, two kids in the back seat arguing over who poked who first might ratchet your stress back up but you’ll be financially stress free. That counts for something right?
This checklist provides you with 10 of the smartest uses of your tax refund. If you’re wondering which of these items you should address first I would recommend items 1 through 4. Once you’ve taken care of these obligations with your tax refund I encourage you to pull up a lounge chair, grab that umbrella drink and relax-you earned it!
How do you plan on spending your tax refund? Please share in the comments.