Your tax refund really represents the amount you overpaid for the previous tax year. That’s your money that’s been sitting idly in a government bank account. Your cash was busy earning interest for said government while waiting to be reunited with you. So, let’s look at how you can best make up that lost time by putting those dollars to work for your benefit.
Pay Off Credit Cards
No, it’s not glamorous, but it’s the single best thing you can do to help your financial picture. Credit cards are insidious wallet drainers. Carrying a balance month to month means you’re losing the credit card game. It can literally take over your life, since compound interest can work against you as well as for you.
Pay Down Student Loans
The same principle applies to student loans as to credit cards, but student loans gets the #2 spot because payback terms aren’t as onerous as credit cards. In fact, if you’re current with payments and carry a low interest rate, there may be better uses for your return. However, if paying a chunk of the student loan gives you more money month to month, it’s worth considering. You can even use the money saved to help pay down your credit card.
Most of use use credit cards from time to time to weather an emergency. For all the bad aspects that credit cards may have, this emergency financial resource ability forgives credit cards many of their shortfalls. But what if you had an emergency resource of, say, a couple thousand? You then have your own interest-free emergency fund. Set it up in an account that’s not immediately liquid, to spare the temptation to splurge.
Invest, Invest, Invest
It’s hard to argue with any form of retirement savings or any other savings opportunity that creates tax advantages, now or in the future, such as education savings plans, for example. If you’re in the enviable position where those savings needs are addressed and funded, then look for long-term investments that you can set and forget and reap the benefits years down the road.
As tempting as is the thought of tax return as free money, it’s really not, so with a little discipline, you can reward yourself in the future, with some applied wisdom today.