Smart Finance: What to do with Your Refund

by Rochelle on March 30, 2012

Courtesy of kenteegardin via Flickr

Most Americans expect a refund each year, but many treat it like some sort of bonus. Remember, this is your money, and like all your other revenue you should invest in wisely. Here are some smart tips for those just receiving a refund, in a relative order of urgency:

 

  1. Reflect: If you received a massive refund, you’re most likely¬†withholding¬†too much. Take note to adjust your withholding allowances on your W-4 next year.
  2. Debt: If you have credit card or other high-interest debt, this should be the first thing you pay off. Mortgages, educational or lower interest debts come second. Paying down debt happens to be the most common use of tax refunds in the us (around 42% of Americans each year use their refund to pay off debt)
  3. Emergency: An emergency fund is the first and most important buffer to prevent financial debt, and you can use your refund to get started or add to it. Your goal should be to put away at least least half a year’s savings in an account with interest (a money market account, or online savings account).
  4. Need: Have you been meaning to get that car fixed, or those pipes replaced? Improvements in your home can be valuable, and preventative measures such as car repair can be a smart step in the long run.
  5. Education: You may choose to put money away for your children’s college experience in an educational savings fund, or possibly invest in continued education for yourself (a move with great potential ROI)
  6. Benevolence: If you don’t have any pressing financial needs, consider giving the money to charity. The benefits are plentiful: you can aid the community, improve your personal sense of fulfillment and claim the donation as a deduction.
  7. Want: If you have been good enough with your finances that you still have nothing left to spend at the end of this list, buy something you’ve been wanting: a summer vacation, a nice dinner, a wine-tasting trip… as long as it doesn’t exceed your refund, enjoy! You’ve been fiscally savvy, and you’ve earned it!

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