So, you just got a nice, big refund check from Uncle Sam, which seems great on the surface.
Sure, you've heard that refund checks aren't actually good because the government is really just handing your money back to you—without interest. You know that, if you could choose, you're supposed to choose no refund at all (meaning that you wouldn't have given Uncle Sam that interest-free loan). But it still feels good when you've got that check in hand.
Think of it as accidental savings, and consider this: The average tax refund is about $3,000, and the average credit card debt in the U.S. is about $3,700. Call it a happy coincidence? Before you make plans to spend your refund on a luxurious weekend away, do this instead:
Pay Your Debts.
Once you have your emergency cash, turn to your debts. A tax refund is a great way to pay off a chunk of bad debt, using money that you won’t miss. If your return is big enough or your credit card bills are keeping you up at night, split your IRS check between savings and debt.
An emergency fund is more important than ever these days, say Timothy Wyman, a certified financial planner with Raymond James Financial Services. “I call it my attitude money; my attitude is better when I know I have it to fall back on.” A LearnVest-approved emergency fund would contain at least six to nine months worth of living expenses, in case you lose your job or are struck by some other financial disaster.
Pay for Retirement.
Most of us put money into our IRAs gradually over the year...or scramble to scrape up a contribution just before tax time. This year, get a jump on it early, especially if you don’t have a retirement account at work. Your money will start accruing interest for you that much sooner, and you’ll already have a deduction for next year’s taxes (if you have a traditional IRA, that is).
Pay Your Taxes.
If you work for yourself or have investments that generate taxable income, you probably pay quarterly estimated taxes during the year. Remembering the deadlines and then figuring out what to pay is a nuisance. If you're the sort of person who's likely to lose track of quarterly deadlines, use your refund to cover all or part of next year’s estimates...and knock a really un-fun chore off your to-do list.
Pay for a Treat (Maybe).
You should routinely strive to save 10% of your income, plus 10% for either debt repayment or additional savings. If you already do this and have everything covered that's listed above, then it’s all right to treat your refund like other income. Put 20% aside for savings (or 10% for savings and 10% for debt repayment) and do what you want with the rest.
Now, where did you put those travel books?