What to Do with Your Tax Refund

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What To Do With Your Tax Refund
If you’re one of the millions of Americans who will be receiving a tax refund this year, on one hand, you may be feeling a bit guilty having “leant” the government those funds all last year, but on the other hand, it sure feels great to get a nice check once that tax return is processed! So that you don’t feel you squandered the tax refund, it’s helpful to have a plan set up for what you’ll do with those funds:

  • Impose Some Discipline – The first thing you’ll want to do is ensure that the money from your refund is separated from your general funds so it isn’t mixed in right away and spent. This might mean putting it into a sub-account at your bank or perhaps even consider opening a new account somewhere and depositing that refund as your first check. This will ensure that the money is there to use as you planned here.
  • Pay Down Debt – One thing many Americans do come tax refund time is they look at their highest debt by either amount owed or by interest rate, and they use their tax refunds to pay it down. While this is a good use of funds once they’re in hand, they would have probably been better off if they had a smaller refund and were using the difference to pay down debt throughout the prior year rather than giving the government an interest free loan. But if this is the next best thing, it’s certainly not a poor use of a windfall sum.
  • Build an Emergency Fund – If you don’t have an appreciable amount of debt and can afford to set the money aside, set up an emergency fund! Trust me; at some point in your life, you’ll need it. It will prevent you from having to make tough choices or forgo a mandatory payment on something else down the road when you run into an unforeseen emergency.
  • Invest in a Money-Saving Purchase – It’s nice to be able to invest money to save more money down the road. This is often the case for various home improvement upgrades. This could be anything from insulating your attic better to getting new windows or a new HVAC unit. While it may seem like a high upfront cost, over many years, you’ll often have made that investment back and then some.
  • Start Investing – If you’ve never actually done any investing outside the typical banking system, now might be a nice time to buy your first stock or mutual fund. Once you see the market moving up and your account growing, it becomes a motivator to invest more. Who knows, maybe this will be the spark that turns you into a heavy investor over the years?
  • Enjoy Life! – We all need to enjoy life once in a while. Perhaps there’s a trip you’ve been putting off or another large purchase that hasn’t been in the cards based on your routine paycheck that you want to entertain this year. As long as your other financial considerations are in check, why not?

The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

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Darwin is an engineer and MBA who takes an "evolutionary" approach to finance, writing about adapting to evolving financial management, tax, investing and savings opportunities. Making more money and saving more money is an adaptive process - join the evolution! He blogs at Darwin's Money and ETF Base. Follow him on Twitter @ Everyday Finance.

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