1. Pay Debt Before Saving for an Emergency Fund
It may seem smart to use your tax refund to pay off all your credit card debt, but this is not the way to go if you don’t have an emergency fund! Think about it, if you experience a layoff or incur hospital bills, you’ll just run up more debt. Instead, pay down some debt but also store some of your money away in case of job loss or medical illness. Most experts recommend having eight to 12 months of savings accessible at any given time. This means having this amount invested in an easily liquefiable, low-risk account, such as high-interest savings or short-term CD.
2. Create More Debt
Although the retail stores would disagree, adding big purchases to your existing debt is not a smart investment of your tax refund money. Sure, it’s tempting to put a down payment on a new car or to spend your refund check on an incredible bedroom set, but this action simply increases your debt and leaves you worse off than you were before your refund check arrived. Just because you receive a large sum of money doesn’t mean that you can actually afford the item that you’re buying. Here’s an easy way to think about it: if you have a credit card, combined with less than eight to 12 months of savings, you can’t afford any new purchases.
3. Be Impulsive
Nothing burns a hole in your pocket faster than cold, hard cash. For many of us, those sales signs seem a little brighter and the ads seem more enticing when we receive our yearly tax refund. But remember how you didn’t need those things before you got your check? The same is still true. Don’t waste your refund by buying things in the store window. Make a deal with yourself. Put the money in the bank and wait a week. If you still want the item and think you can afford it, then go for it. But make sure you can REALLY afford it before you buy.
4. Put the Money Under Your Mattress
Make your money work for you. If you decide to save your tax refund, invest it in a high-interest savings account such as those offered by ING Direct or Emigrant Direct. Don’t rely on your bank’s traditional savings account, as these yields can be next to nothing. Aim for percentages between two and five percent interest, depending on the market’s going rates.
5. Buy Wants Over Needs
If you are going to spend your tax refund, do so on NEEDS, not WANTS. If your car is broken down or you are without a washing machine, then these material investments make sense. But a trip to Italy is not considered a need, especially if you have any amount of debt. You want to spend your money on something that will benefit you and your family in the long-term.
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