How to Spend an Income Tax Refund:
Ten Money-Smart Suggestions

Expecting an income tax refund this year? Use it wisely!

1. Pay down high interest lines of credit. With average annual interest rates for credit cards hovering around fifteen percent, paying off consumer debt before going on a shopping spree makes good sense.

2. Fund Your Retirement Account. Millions of working Americans have no money invested for their retirement. If you are one of them, seriously consider using your refund to make a contribution to an IRA.

3. Invest it. Many people get thousands back at the end of the year. If you invest one lump sum of $1,500 in the stock market, with a 10 percent return (the long-term market average), you could have $30,173.73 in 30 years!

4. Open an emergency account. How much money do you have set aside for emergencies? If the answer is “none,” open a savings account today. Three to six months’ worth of essential living expenses tucked away is a great goal.

5. Pay for repairs. Maintaining expensive possessions now will result in dollars saved tomorrow. Use the money to repair that leaky roof before it develops into a bigger problem; replace those dangerous bald tires with new, safe ones.

6. Start a personal endowment. Consider applying the money to your emotional, physical, intellectual, or career growth. Whether you use it for a gym membership or a cooking class, you'll soon reap the reward of this investment.

7. Make an extra mortgage payment. Why? Doubling up on one mortgage payment now can save you months of mortgage payments later.

8. Donate to a charity. Giving back to the community is a wonderful way of supporting a cause that you are passionate about. Even better – in many cases at least a portion of your donation is tax-deductible.

9. Open a 529 College Savings Plan. A four-year college education can cost upwards of $100,000. Save for your child's college career with a 529 plan. It works much like a Roth IRA, and withdrawals are completely tax-free when used for higher education purposes.

10. Plan a vacation. If you are in a healthy financial position, and can afford a bit of luxury, do something you've been dreaming of! Money is to be enjoyed as well as earned, saved, and invested. Go ahead. Book that cruise.

Certainly there are many savvy ways to spend a tax refund, but keep in mind that it’s usually best to come out even. If you’ve been getting money back each year, consider changing your withholding exemptions so less tax is withheld from each paycheck. While a refund may feel like a gift from Uncle Sam, it's not – it's money that you have overpaid on your income taxes.

Other Related Articles: 9 Ways to Master Your Money, Save While Splurging, Basics of Smart Tax Management

Copyright © 2007 BALANCE
Close Window