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5 Things You Can Do with Your Tax Refund

{ Posted on Apr 16 2010 by Marcus Alston }


With more than 70% of tax filers typically receiving a tax refund and the average federal refund being just over $3,000, what should you do with your tax refund?  Below are 5 options to consider:

1.  Pay off High Interest Rate Debt.  If you have high interest rate debt (possibly on store credit cards, national credit cards or high interest rate loans), save on interest by paying these off or down immediately. By paying off debt, you save on the interest you were being charged on it.  For example, if you receive a $4,000 refund and pay off a $3,000 credit card balance at 20%, you will save roughly $600 in interest over the year.  In any event, there are certain do’s and don’ts regarding managing credit card debt that you should follow.

2.  Create an Emergency Fund.  Many financial advisors suggest maintaining at least 3 to 6 months of your household income in an emergency fund in case you lose your job or have other financial emergencies.  If you have no high interest rate debt, this probably would be the next place to focus your refund.

3.  Jump Start Your Savings, Investment Account, or Retirement Fund.  If you need to build your savings or investments, and already have an emergency fund, consider putting this money away in a savings, money market, certificate of deposit, investment account, or purchase some stock.  According to the Motley Fool, if you save for a 40 year period, and you start with $1,000 and invest an additional $1,000 each year, you would end up with $532,111.07 (assumes a 10% annual return).  This could really help you afford to retire or be a great foundation.

4. Build an Educational Fund.  Don’t forget the kids.  Consider putting some of the money from the refund into an educational fund.  Every little bit helps and adds up over time.  If you put a $1,000 away a year for your child for 18 years, you will have $18,000 for them assuming you do not invest it.  Factoring in an 8% annual return through an investment, you would have $40,446 at the end of 18 years.

5.  Pay off your Car.  While your car may be at a low interest rate, having no car payment is great for your cash flow and will allow you to pay down debt faster, save more, borrow less, investment more, etc.  If your return is not big enough to pay off your balance completely, the benefit may not be as big.  If you pay off a car note that was costing you $400 per month and you keep that car for just 5 more years, you will have saved $24,000, assuming you do not invest it.  Factoring in an 8% annual return through an investment, you would have $29,587 at the end of 5 years.

Conclusion.  Do something with your refund that will benefit you financially.  Receiving a refund means Uncle Sam is using your money interest free, but I suggest that this is better than owing at tax time and is another way to live on a reduced salary and below your means.  Additionally, many people do not notice the extra money in their pay check and owing at tax time is not a great feeling.  And if you don’t need to do one of the five options above and or are financially in a stable place and staying within your budget, then you deserve to spend a little on yourself.

Brief Facts.  More than 70% of tax filers typically receive a refund.  The average federal income tax refund for tax year 2009 is $3,036, according to March 23, 2010 data from the Internal Revenue Service.

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