Tax season usually means mostly unpleasant thoughts and lots of stress. But there is one upside: the potential of getting a refund.
In a March 2013 article in Time magazine, it is estimated that this year 85% of Americans expect to get an average refund of $2,800. While it’s true that technically it’s your money you are getting back, getting a refund check in the mail still leaves people with extra cash on hand.
Now, what are you to do with this refund?
Many people fall victim to splurging on material items or a vacation; but if you are reading this, don’t let that be you!
What would a wise person do with a tax refund? Put it in savings? Invest?
I’ve received quite a few questions from our readers asking for advice on this very question. And although I strongly believe that a professional financial advisor is always a smart decision, here are some general options for most people receiving a tax-refund:
1. Get closer to your retirement goals.
- Take an inventory of your retirement vehicles. If you’re not maxing them out already, take some (or all) of your refund and put it towards your retirement goal. After all, retirement is probably your ultimate financial goal.
- Or, if you’ve been meaning to start planning for your retirement (hint: it’s never too early!), then this may be a good time to take a look at the many investment vehicles available to you, such as an IRA or a mutual fund, or maybe you need to roll over that 401(k). For anyone looking to invest, I recommend always consulting a professional.
2. Build up your emergency fund.
- I see too many people who wind up in credit card debt because they don’t have a basic emergency fund. Without an emergency fund you are likely (almost guaranteed) to find yourself in a situation that you weren’t ready for and have to swipe that shiny credit card. You should have at least six months of expenses saved in a savings account for “just in case” scenarios. If you don’t already, use your tax refund to get closer to that goal.
3. Check the status of your debt.
- At this point, you probably have used all of your tax refund; but if you have a particularly impressive refund, next you should take on any existing balances you have on your credit cards and other debts like student loans. If you are looking to pay off credit cards, check out our Credit Card Debt Analyzer and start paying off the card with the highest interest rate.
Tip: For the rest of the year when you don’t have a tax refund to make good use of, get in the habit of “paying yourself first” by setting up automatic transfers to your savings account or retirement accounts. Start with a low percentage of each paycheck, like 10%; once you are comfortable with that, move up to 20%. You’ll be amazed at how much faster your savings goals are being met!