Wondering What to Do with Your Tax Return?
I found out recently that I'll be getting a tax return this year. After spending awhile daydreaming about all the ways that I wanted to spend my tax return, I decided that I'd learn a little bit about how I should spend (or save) my return. If you have some money coming back this year in the form of a tax return and are wondering what to do with it, consider the following tips:
Pay Off High Interest Debt: If you have credit cards or other high interest debt, pay that first. Saving money isn't going to do you any good if you are paying upwards of 20% on a credit card or another consumer loan with high interest rates. Get rid of those first and then don't carry a balance any more.
Start or Add to Your Emergency Fund: Most financial experts suggest that everyone should have a three month reserve on which to live in case of the loss of a job or other reduction in income. Some, like Suze Orman, even suggest having more than that. If you are getting a tax return this year and don't have any high interest debt, consider starting to or adding to an emergecny fund. This money should be held in a savings or money market account where you can earn interest, but it's also important that you be able to access it immediately without penalty. Long-term investments are not good for an emergency fund.
Invest Your Tax Return: If you already have an emergency fund that's large enough to cover at least three months worth of your living expenses and you don't have any high-interest debt, you are in better shape than probably 90% of Americans. That doesn't mean that you should go out and blow your tax return, though. You are in a good position because you get to invest your return. There are many investment vehicles for you to choose from and you should talk to your tax advisor or another financial planner to see what investment would be best for you. You may be able to start or add to an IRA, start a college savings plan, invest in stocks. There are a wide range of options available to you and what you choose should depend on your investment goals.
Save a Small Amount for Fun: I'm all about saving and doing the responsible thing, but I also think that there is a time to have fun. Use a small portion of your tax return to do something fun with your family - go out to dinner, let everyone pick out a new outfit, take a day trip to an amusement part or museum - whatever it is that your family will enjoy. Just use the rest of it wisely!