If you are lucky enough to receive a tax refund from the IRS this year, then you are probably thinking about blowing it on something fun. It’s great to receive a windfall of cash, but can you really afford to spend unexpected money like that? Hold off throwing a big party until you go over this list:
Reduce credit card debt. If you have any credit card debt, then you should use your tax refund to pay the debt down. The interest rate on credit card debt can range from 11 percent to 24 percent. You are sending the bank a bunch of your hard-earned money every month when you carry a balance. If you are just paying the minimum every month, it will take many years to pay off the debt. Nobody likes to owe money and a refund just might give you a boost in the right direction.
Build an emergency fund. Experts recommend having 3 to 6 months of living expenses available in an easily accessible account, such as an online savings account. This account will help you get through a patch of big bills like car or house repairs. Without an emergency fund, you can easily get into debt at the first hint of bad news. Your tax refund probably won’t be big enough to cover 3 to 6 months of living expenses, but it will get your emergency fund started if you don’t have one.
Save for retirement. It may seem far away, but we have to think about the future. The Roth IRA is a great retirement saving option, and you can use your tax refund to get a jump on it this year. In 2013, the IRS raised the IRA contribution limit by $500 to $5,500. The great thing about investing in a Roth IRA is that you won’t have to pay any tax on the earnings from that account. Wouldn’t it be great to use your tax refund to avoid paying more tax in the future?
Give to charity. Giving all or part of the refund to charity is a great way to spend your refund. It’s easy to put off giving to charity because our budgets are so tight. If you keep putting it off until the end of the year, then your budget will run into Thanksgiving and Christmas. The holiday season can be expensive, and it’s hard to set money aside at that time of the year. Giving to charity now is a great way to start off the year. You will also get a tax deduction for the next time you file your taxes.
Finance a refinance. If you own a home and have not refinanced recently, then you should check with your bank. Interest rates are still very low, and refinancing can save you quite a bit of money in the long run. You will have to pay closing costs and fees, but that’s where the tax refund comes in. Refinancing can lower your monthly payment and free up a little money every month.
If you are already on track with all five items, then you deserve to have a little fun. Perhaps a little vacation to get away from the snow is in order.
Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing, and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.