How to make a tax refund really pay off

Posted by on April 29, 2010 @ 12:53 pm in Taxes

Do you have a tax refund coming? Some would say it means you over-withheld and should have paid less last year. Others look at it as a non-interest-bearing savings account. I’d look at it as an opportunity to improve your financial picture and prepare for the next inevitable downturn—whether it happens next week, next month, or five years from now.

Remember: A tax refund isn’t really a windfall. It’s your money—you earned it. It was deducted from your paycheck or through quarterly deposits. While you could use your refund to take a vacation or remodel the kitchen—wait, please. When you receive a tax refund or any other substantial payment (such as a bonus at work or an inheritance), I believe there are some good rules of thumb to follow.

First, replenish your emergency fund if you’ve drained it, or increase it if it was too small to begin with. In this economic downturn, many people have found that the old guideline of keeping three to six months’ worth of expenses on hand wasn’t enough. Make sure you have at least that much money readily available. Knowing that you have some financial breathing space and can handle unexpected expenses can be a great source of relief.

Next, attack your credit card debt. Credit card interest payments are punishing fees for using someone else’s money. They are an insidious drain and rob you of options to make other financial decisions. Get this weight off your shoulders and try to keep it off. Depending upon the amount of your refund, you might be able to set yourself on a new course.

OK, if your emergency fund is in good shape and you’re not being eaten alive by credit card interest—and if you’re lucky enough to be gainfully employed—think about investing for retirement with whatever funds are left over from your tax refund. Last time I checked, we are all largely responsible for funding our own retirements. Giving your retirement savings a boost is a great idea.

So, when you get that refund check, pause, think, and then act in your own best interest. You’ll be glad you did.

Follow

Get every new post delivered to your Inbox.

Join 166 other followers

%d bloggers like this: