The average tax refund check issued in 2002 was for more than
$1,900, according to the Internal Revenue Service. While tax
refunds are not windfalls – you’ve actually given the IRS an
interest-free loan of your hard-earned money – you should think
carefully about how you plan to use this money.
The average tax refund check issued in 2002 was for more than $1,900, according to the Internal Revenue Service.
While tax refunds are not windfalls – you’ve actually given the IRS an interest-free loan of your hard-earned money – you should think carefully about how you plan to use this money.
When it comes to making your tax refund work for you, there’s no one right answer for all families, says the California Society of CPAs (www.calcpa.org).
For some, paying off debt will provide the greatest peace of mind. Others might find a new investment is the way to go.
For others still, the freedom to spend some money without worrying about upsetting the monthly budget provides a much-needed psychological boost.
The important thing, say CPAs, is to carefully think through the best use of your tax refund before spending it impulsively.
If you’re paying double-digit interest rates on credit card debt, using your refund check to pay down your debt makes excellent financial sense. In fact, there’s a double benefit for you.
Not only do you eliminate or reduce the amount you owe on your credit card, but you avoid additional interest payments that add to your debt. CPAs recommend that you pay off the credit cards with the highest interest rates first.
Generally, CPAs and other financial professionals recommend that you set aside three to six months of living expenses to carry you through an adverse event, such as a layoff or illness.
If you don’t already have an emergency fund, your tax refund can help you get one started. Just be sure to keep the money in a fairly liquid investment, such as a money market account or short-term CD.
A good place to invest your refund check is in a retirement account, where, over the years, even a small contribution can make a big difference. If you’ve been putting off opening an IRA until you had “a little extra money,” here’s your chance.
A tax refund also can be a boon for workers with 401(k)s. For example, if you are contributing 3 percent to a 401(k) plan that allows you to put in more, consider increasing your contribution rate. You can use your tax refund to help offset the extra amount being taken out of your paycheck.
If saving money from your weekly paycheck is difficult, investing your tax refund check can give you a jump on creating an investment portfolio.
You might want to start with a mutual fund that has a low minimum opening deposit.
