So you’re getting a tax refund. Maybe you are already thinking about all the ways you can spend it. The problem is, many people spend it several times before it even gets in their hands, and then where are they? Deeper in debt and overcome by stress.
Before you spend this year’s refund, take a deep breath and consider these tips:
First of all, why are you getting a refund to begin with? Rather than letting Uncle Sam use your money all year long, why not reduce your withholding allowance (Form W-4) so you have more income in each paycheck? Take that increase and use it according to the rest of these suggestions.
- Pay down debt. This should be the first place to put your money. If you are getting zapped with interest on a loan or credit card, especially if the rate is more than you can earn elsewhere, paying off debt will generate even more ready cash because the interest rate on your card or loan will then apply to a lower balance.
- Set aside for emergencies. Everyone should have 3 to 6 months of their normal monthly income on reserve. This gives you a cushion in our volatile times against a lay-off, illness, or even an unexpected major expense. It’s what keeps the savvy folks out of debt and keeps their invested money growing.
- Save or Invest. If you have the first bases covered, then at least a portion of any windfall should be put towards the future. Investing in the stock market is the best way to avoid losing money due to inflation and growing your money (8-12% is historically reasonable), but only if you can leave your money invested for the long haul. Investing is for long-term goals. If you need to save for something in a 5 year window or less, like a car or new roof (which can be as much as a car—ask me how I know!), then you want to save money where you can get the most interest for little or no risk.
- Spend a little! If you are well on your way towards reaching the goals you have set, based on your age and the time you have left to get there, then split it up. Save some and spend some!
The key is to have a plan, and a good idea of what your income and expenses are, so you can feel comfortable with your choices. Anything else just leads to more stress. And who needs that?