Wednesday, April 24, 2013, AM | 2 Comments
It’s more than a week since the deadline for filing the U.S. tax return forms. If you are like most taxpayers, you have e-filed your return. Folks who indicated on their return and filled information for direct deposit, IRS suggests you should get your refund within 21 days.
Those who have received their refund and it’s sitting in saving or checking account collecting dust considering the measly interest banks offer, you have option to do something useful with it.
There are folks in America who just can’t see the sign of cash sitting in their account. They gotta spend it. But spend it on what? Why not use the money in ways that would give you some peace of mind for years to come.
For many folks, it’s very tempting to go on shopping spree – unnecessarily and recklessly spending their tax refund. However, a few weeks or months later, they will rub their hands in despair and wondering what happened to their money.
According to IRS, the average Federal refund this year is $2,755 and that from state is a little less than $800. For many folks, that’s a lot of money and to spend it on needless shopping or partying is the stupidest thing one can do.
Here are some points to keep in mind to decide what to do with your tax refund:
Pay off your debt
The most debt folks carry comes from credit cards and that’s probably the most expensive with the highest interest rate of any industry. So your first priority ought to be to pay down credit card debt. There are ways to do it. You can start with paying down the card carrying the highest interest rate.
Start emergency fund
If you don’t have emergency fund for three-to-six months of expenses, start saving now. Put aside at least $500 into this account. This is for when you need to cover unexpected expenses that might include buying a new tire if one gets busted completely, unexpected medical bill or other similar expense.
Save for retirement
If you have contributed maximum percentage allowed by law in 401(k), you probably cannot contribute to traditional IRA. However, if you are eligible for ROTH IRA, do contribute to it. In the absence of 401(k), contribute part of the money to traditional IRA during the current year so it would be tax deductible next year.
If you didn’t have the money and have put off repairs in the house or car maintenance etc., you can do so now with your tax refund.
Pay extra month for current year
Make an extra payment in your mortgage, student loan, or car loan. Ask the lender if it can put the extra payment towards the principal. Many banks would accommodate it.
To splurge or not to splurge
Some so-called finance gurus would suggest to splurge a little. Please don’t. Once you start splurging, you might continue doing it. It’s more fun when you spend freely or extravagantly.
If the palm of your hand is itching a lot and you wanna spend some money, do so but make sure what you spend it on will last for many years to come.
The worst splurging is to spend it on partying, alcohol or even multiple cases of beer.
In a Nutshell
Show some smartness for once in your life or once a year. Don’t splurge, don’t spend recklessly, don’t avoid repairing your financial home, don’t mess up your finances that you would feel sorry for months or years from now.