Ready for a nice, fat tax refund check from Uncle Sam? Before you get too excited, soberly think about how easy it is to waste that money foolishly.
All too often, extra money makes people splurge, even while they imagine they’re saving it. How do you make sure this year’s windfall makes your life better over the long haul? Try these nine ways.
No. 1: Pay down high-interest debts
High interest rates on your debt can lead to devastating costs. Eventually, you can end up with payments so large that it becomes difficult to do more than pay the minimum required each month.
That’s why one of the best uses for a windfall is to use it to pay down debts with the highest interest rates.
Think of this way: Paying off a debt with a 15 percent interest rate is like earning 15 percent, risk-free and tax-free. That’s an investment virtually impossible to find these days.
If you’ve used your tax refund to pay down debt but are still saddled with high interest obligations on credit cards or payday loans, use this moment to escape the cycle. Go to our Solutions Center to search for trustworthy sources of free credit counseling and get help.
No. 2: Pay off small debts
Paying off high-rate debt first generally makes the most financial sense, but it might not work for you. Some people get more satisfaction from demolishing smaller debts first. Then, as they see those debts fall by the wayside, they have more motivation to tackle bigger debts.
A reader discussed the potential value of such an approach in “How I Wiped Out $37,000 of Debt in One Year.”
Remember, be careful not to run up new debt and dig yourself back into the same hole.
No. 3: Fatten your emergency fund
You are debt-free? Bravo! In that case, strengthening your financial safety net may be the next best use of a tax refund.
Opinions differ on how much to save for emergencies. Many experts advise keeping enough money to cover expenses for six months or longer.
Ask yourself the following: If you lost a job, how long could you expect to be unemployed? The length of time someone is unemployed typically depends on the type of work he or she does, and the state of the economy.
Your savings should be greater if you’re older because it often takes older workers longer to find work.
No. 4: Save for retirement
Saving for retirement should be a top goal. A Money Talks News reader named Retha asked MTN founder Stacy Johnson whether it makes more sense to save for retirement or to pay down the mortgage. Stacy’s answer was clear:
Job one for people in Retha’s position should be to put aside as much as possible in tax-advantaged retirement accounts. Priority two should be saving as much as possible outside of retirement accounts. Only after building a comfortable cushion should you use spare cash to pay down a mortgage.
For more detail, check out: “Ask Stacy: Should I Save More for Retirement or Pay Down My Mortgage?”
No. 5: Save for college
Whether it’s for your education or your kids’ schooling, apply your refund check to a college savings plan that offers tax benefits in addition to saving money for college.
No. 6: Invest in your productivity
You also can leverage your refund to grow your earnings. Here are three ways to do it:
- Get more education: Sign up for a workshop or course, or attend a conference or webinar. Upgrade your skills, or try out a new field.
- Invest in the right clothes: Get a tasteful, understated but impressive outfit for work or job interviews. Make sure it’s one that makes you feel like a million bucks — and include some good shoes.
- Buy the equipment you need: Get the new laptop, tool or piece of electronic equipment you need to move ahead in your field.
No. 7: Hire a career coach
Career coaching can help you discover strengths, identify where you can use help, set goals and strategize. There are many ways coaching can help further your career.
No. 8: Contribute to charity
Do good for others while helping yourself earn a healthy deduction on your taxable income in the next round. Make sure to get a receipt for your contribution, and be sure the organization you support is a legitimate charity, as defined by the IRS.
No. 9: Start a business
Make your refund your grubstake. Start the business you’ve been dreaming of, whether it’s consulting, opening a coffee cart or retail outlet, selling your crafts or patenting an invention.
What will you do with your tax refund this year? Share your thoughts in comments or on our Facebook page.
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