Friday, March 29, 2013

What do I do with my Tax Refund?

With all the curses and frustrations that come with filing your taxes this time of the year, there also comes a blessing (at least for some of us) in the form of a tax refund.  With that in mind, your tax refund can be quite a benefit to your finances if handled appropriately.  It's easy to say that you now have the money to purchase that TV you've always wanted, but it's far wiser to put it towards benefiting your long term financial situation.  Here are my own suggestions:

1.) Adjust your deductions - If you're receiving a refund of more than $500, you should probably adjust your weekly deduction so that you are receiving a little more money throughout the year.  There are better uses of your money such as paying down credit card debt and saving for your future than letting the government take it.  That said, from a budgeting perspective it's always better to receive a refund than having to pay more.  It's a fine balance that you will only really master over time.

2.) Pay Down Credit Card Debt - Now is a perfect time to pay down your credit card debt and get that burden off of your shoulders.  With some interest rates around 20%, paying off this debt will mean more net income for you and your family throughout the year.

3.) Pay Down Other Debts - If you mortgage, student loans, private loans, etc... have interest rates of more than 4%, it probably makes sense to pay these off more quickly than contribute to a retirement account.  You could use your money to make an extra payment on your mortgage.  Over time, doing this every year could reduce the timing on your mortgage by a couple years.

4.) Make a Catch-up Contribution to your Retirement Accounts - If you are not maxing out your 401k contributions to $17,500/year, or your IRA contributions at $5,500 per person, then here is yet another opportunity to improve your future financial situation. 

5.) Make Home Repairs - Besides being mostly likely your biggest asset, your home is where you spend a vast amount of time in so it makes sense keeping it working and in top shape.  Use your money to repair a window, reinsulate a room, and put a new paint job on.  If you plan on moving soon, you might even get a small return on your investment.

6.) Finally, if you've done all this stuff and are in a good financial situation, you should take the family out for dinner and celebrate each other.  Too many families don't acknowledge how special each other are, and a tax refund is a good opportunity to do this.

Try to take the emotion out of your spending habits, especially when small windfalls such as a tax refund come into play.  If need be, give yourself a week to think about the money before spending it.  You'll likely make a wiser financial judgment with some time under your belt.

Wonderful Moment of the Day: Happy Good Friday!

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