• Smart Ways to Use That Tax Refund

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    This is a guest post by Jim from Bargaineering. He keeps telling me to call him “Jimsane” or something like “Jimsanity”, but I told him that there’s another asian guy doing that already.

    Right around this time, half of you will have already filed your taxes and the other half are just about to file your taxes. For the ones who are done and are simply waiting for their refund check (or more likely, waiting for their refund direct deposit), you might be wondering what you should do with the money.

    Last year, the average tax refund was a little under three thousand dollars. No matter how you slice it, that’s a sizable windfall and it’s important that you take steps to do the right thing with it.

    Pay Down Debt

    If you have any high interest debt, consider using some of your tax refund towards paying down that debt. Debt can be a big weight on your finances, especially if it’s high interest credit card debt, so whenever you can lighten the load, do it. You don’t have to take your entire refund check and put it towards the debt, but take advantage of the windfall to give yourself a little more breathing room.

    Review Your Savings Goals

    If you are fortunate enough to not have any debt or you’ve put some of your refund towards it already, consider reviewing your other savings goals and giving them a boost. Are you planning on buying a new or used car soon? What about a home? How about college savings for the kiddos? Whatever the goal might be, carving off some of that tax refund and earmarking it towards a goal can give you a real boost. Maybe you’re close to hitting your savings target and an extra hundred or two gets it checked off? Or maybe you can get to the halfway mark – these psychological milestones are important because it gives you a psychological edge to keep saving.

    One crucial savings goal everyone should have is a well funded emergency fund. Emergency funds can help mitigate financial disasters, like unexpected medical bills or a car breakdown, and they are much better than relying on high interest credit cards.

    Increase Your 401(k) Contributions

    Divide the refund by 12 and give your 401(k) contribution a boost by that amount – replacing the income you are contributing with the refund check you just received. There are two reasons why this is great. First, you are saving more for your retirement which means you will have more in your nest egg when you do decide to call in quits. Second, since 401(k) contributions are tax deductible, it means that, all other things remaining the same, you will get an even larger tax refund next year, depending on your tax bracket, since your income will be lower.

    Donate to Charity

    If there are worthy organizations doing good charitable work, consider donating a bit of your windfall towards their efforts. If you do it now, you won’t be able to claim it as an itemized deduction until next year but the organization will be able to use it now, when donations are often at their lowest. If you do itemize, this also means a lower tax bill next year. I like to use Charity Navigator to research the effectiveness of charities.

    Take a Vacation

    Take a little bit of that refund and reward yourself. Being financially responsible all the time can be difficult so it’s healthy to do something fun for yourself. Take a vacation or buy yourself that fun gadget you’ve had your eye on. It’s like cheat days when you’re dieting, a little fun ensures you don’t fall off the wagon.

    So, what do you have planned for your tax refund?


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