What To Do With Your Tax Refund Money

Many of you will receive a tax refund this year for various different reasons. It’s funny how we get so excited when we find out we’ll be receiving a refund, but it should have been money never taken from us! I guess an unexpected tax credit changing jobs could cause a tax refund unexpectedly, but many times we overestimate our tax withholdings. If you are receiving a huge refund this year, revisit your W-4 form to check how many exemptions you are claiming. Not sure what to do with the small windfall of money coming back to you? Here are some suggestions with what to do with your tax refund.

Pay off Debt. Start your debt snowball, and clean up some of your small debts like high-interest credit cards or the remaining balance on your car payment.

Beef Up Your Emergency Savings. In this economic climate, it doesn’t hurt to have a big cash reserve. The liquidity ratio, when speaking in terms of personal finance, is as follows:

All cash and liquid assets / All necessary expenses (rent, utilities, food, transportation, etc.)

Calculate this ratio to find out how many months you can pay your living expenses before your cash will run out. For instance, if I had $10,000 in the bank, and it costs $2,500 per month for me to live, then the ratio would be as follows: $10,000 / $2,500 = 4. I would be able to pay for my necessities for four months before my cash ran out.

Refinance Your House. Mortgage rates are below 5% for the first time since the housing boom, except this time the price of homes is far less than in 2004. When you refinance, you will still pay closing costs. Use the refund to pay for the closing costs, and you will save thousands of dollars per year on mortgage interest.

Open A Roth IRA. I know, many of you are weary of the stock market. But, whether you put the money in mutual funds, bonds, or a money market account, the IRS doesn’t care as long as you put it in an IRA. Using your tax refund to create a tax deduction, how does that sound?

Have Some Fun With It. If you’ve been killing it the past year with investing and paying off debt, don’t feel guilty using the extra cash to go on a vacation. Don’t let your eyes get too big for your stomach. Some people get $2,500, and they decide to go on a $5,000 vacation. Use the money you have, and make sure you don’t go into further debt to have fun.

Once the money hits your bank account, give it a purpose. Don’t just let it sit in your checking account. If you do, it will get eaten away by eating out here, shopping for clothes there, and getting Starbucks every day. Before you know it, you’ll have nothing to show for the refund. Throw it in your short-term savings account, and give the money a purpose.

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