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By Michelle Parker Sharrow, MBA

Planning smart money moves for your tax refund? Tax season kicks into high gear this month. As you anxiously wait for your W-2 Forms, 1099 Forms and other tax documents, why not think of a plan for this year’s refund if you think you have even a remote chance of getting one. Why? Because it’s better to have a plan in advance of receiving a refund, than it is to wait until you receive it and risk folding it into your regular spending money. And, by the way, the average refund last year was $3,071. You could do a lot with that. Here are some options.

Emergency Fund

Option one is always the emergency fund. Each family should have three to six months worth of living expenses saved up for a rainy day. If you don’t have one or have tapped into yours over the past year, your tax refund is an effortless means to help you establish or replenish one.

Pay Off a Credit Card

If you carry an outstanding balance on a credit card from month to month, you could also use your tax refund to pay that down or off entirely. Such a move would have immediate effects on your household budget by either wiping out a recurring payment, depending on the amount of the outstanding balance, or reducing the amount of your monthly payment. This is a smart money move.

Individual Retirement Account

If you have an emergency fund and no credit card balances, add to your retirement nest egg by opening an individual retirement account (IRA). Before you file this year’s return, consider the tax implications for this year’s return by thoroughly reading the instructions and tips for handling IRAs in your tax software or consult with a tax expert.

College Savings Plan

Assuming you have tapped out all of the other options, next up is the college savings plan which allows you to save for your children’s future college expenses. While opening one might not have any tax implications this year, it could certainly reduce your taxable income for the 2013 tax year. This is also a smart money move. Think beyond this year if you can.

Life Insurance

Lastly, if you have small children and substantial debt such as a mortgage, car payment, or student loan, a tax refund could help you better prepare for their needs in the event of an untimely or unexpected death of you or your spouse. Rather than paying on a monthly basis, you could use the entire refund to pay for several months or years worth of life insurance premiums –depending on your age and whether you modify an existing policy or establish a new one.

There are several things that you can do this year to improve your long term financial situation. Starting an emergency fund, individual retirement account, or a college savings plan are all smart choices for expending a tax refund. Whatever you decide to do, make a decision now and try to take actions that have lasting effects.

Michelle Sharrow

Michelle Sharrow

Michelle P. Sharrow, MBA author and editor of Family Finance, is based in Waldorf, Maryland, she holds a Masters Degree with a concentration in Finance. Michelle provides a monthly column on ways to help families maintain their finances and stick to a budget titled, Budgeting and Savings for Families.
Michelle Sharrow
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