Five Smart Ideas for Your Income Tax Refund

Do you look forward to tax season each year? Are you expecting to have a few extra dollars flowing into your hands because of it? If so, before you head to the local mall or electronic store to reward yourself with a nice gadget or the latest shoes, here are five smart ideas on how to use that money wisely.

Establish Your Rainy Day Fund

A rainy day fund is an account that you can use to pay for unexpected expenses. Most families don’t have thousands of dollars remaining at the end of each pay period. So an unexpected expense such as your car breaking down or your furnace going out is likely to send your household budget into shock. Rather than throw your budget into overload, you could pay for these expenses by tapping your rainy day fund. Every household should have a rainy day fund – not the same as your savings account – to cover these types of expenses. If you don’t have one, start one with a minimum of $1000.

Pay Off High Interest Credit Cards

Wouldn’t it be nice to have one less bill to pay each month? If you are expecting a refund of any size, and already have a rainy day fund, consider lowering the outstanding balance on your credit cards. If you have more than one card, consider two options. The first one is to pay off the card with the highest interest rate. Or if you have a card with a small balance of say, $500 or even $1000, you could pay that off quickly and be done with it.

Purchase an IRA

If you don’t have any credit cards or other outstanding debt to reduce, another option for your income tax refund is to purchase an individual retirement account (IRA). A means to save towards retirement, IRAs are available through most major banks and credit unions. In some cases you can also lower you tax liability during the current tax filing season by purchasing an IRA, see your tax preparation specialist for details or read the question and answer on this topic in your tax software.

Invest in Your Home

If you plan on remaining in your home for a significant period of time, consider making some home improvements with your tax refund. Small updates to your bathroom or kitchen such as replacing the floor, countertop and lighting fixtures will not only add to your home’s value in the long run but will also make your home more appealing to you.

Don’t Forget College Savings

If you don’t have any debt, have a rainy day fund and significant retirement savings, another alternative – if you have children – is to invest in their futures by contributing to a 529 plan for their future college expenses. You can make a lump sum contribution now and forget about it until next tax season or you can make a small contribution now and commit to making contributions every month going forward. To learn more about 529 plans, you can visit the website savingforcollege.com.

While it may be tempting to spend your income tax refund by updating your wardrobe or purchasing the latest gadget, now is the perfect time to right yourself financially by reducing your existing debt and bringing your bills current if you have found yourself falling behind. If you are fortunate enough to be in good financial shape, you could boost your retirement savings or your child’s college savings, or invest in your home. All of these options are smart choices that if taken today will provide you with an even bigger payoff in the future when you may need it most.

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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