What Should I Do With My Tax Refund?

This is a very simple question with a complicated answer. You always want to be able to save money but on the other hand, you need to pay down your debt. There are many options to consider such as the refund amount, amount (and type) of debt you’re carrying, the interest rates, your savings and retirement nest eggs.

Refund amount – The size of the refund will determine what you can do with the money.  The larger the refund, the more options you have.  Whatever the amount, you need to use it wisely and get those return on the subsequent investment.  Depending upon the amount, you can even consider multiple uses such as dividing it between debts and savings.

Amount of debt you owe – How much you owe on your loans and credit cards is very important.  Prioritize by those that are past due, then by interest rate.  Don’t accelerate installment debt because there’s no value to that.  Revolving credit card debt has to be at the top of your list because it’s so expensive to carry.

Interest rate of revolving debt – Interest rates for credit card debt are very high at 14.5% and higher.  This might be your #1 target!!  Consider paying more toward the credit card with the highest interest rate or with the highest balance.

Savings – Do you have any emergency money for expenses if you suddenly lose your job?  If you don’t, or you’ve depleted the fund, it may be time to rebuild it. It is a good practice to have at least 6 months of expenses in this fund.  Savings interest rates are very low and can be as low as .6% but don’t focus on that too much.  This isn’t an investment, it’s a safety net.

Retirement – Do you have a retirement account?  If you don’t have any outstanding credit card debt, are current on your mortgage, car loan and have money in savings for emergencies, you should consider putting money into a retirement account. If you have a 401K plan at work and have an employer match program, you shouldn’t consider investing in it….you MUST invest in it.  If you don’t, consider investing in a Roth IRA or IRA. Putting money away for your future is never a bad decision.  Start building wealth!!

And no, you should not spend your refund on diamond rings regardless of my choice of graphics.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Debt, Debt Consolidation, Debt Management, Financial, Money & Identity, Saving Money

This post was written by John Ulzheimer