How to Spend Your Tax Refund Check

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Sometime over the month or two (depending on how proactive you are about doing your taxes), you’ll probably be getting a nice fat refund check. Last year, the average tax rebate check was a princely sum at over $2,500. If you’re one of the many millions getting a check, you have a pretty big decision ahead of you. Do you pay down some of your credit card debt or put it in savings? (CD rates are looking better lately)

If you aren’t sure what you are going to do, here are a few ideas:

Keep Some For Yourself

I’m a firm believer that most of us want to be disciplined but few of us are able to follow through unless we can blow off a little steam. As much as it may make financial sense for you to take the entire rebate check and put it towards savings or towards paying off debt, the reality is that you will want to take a little bit on something fun. By giving you and your family a little bit of fun, you don’t feel like you’re constantly deprived. Saving is good, but if you never enjoy the fruits of your labor you’ll find yourself cheating… and that’s bad.

So take a bit and treat your family to a nice dinner out or a fancy dinner in (you should try making Provençal Rack of Lamb, it’s not a terribly difficult recipe I promise. Take everyone out to the movies or perhaps to a show. Whatever it is, be sure to do something you really enjoy so you don’t feel deprived. What about the rest?

Emergency Fund

If you don’t have at least six months of expenses saved in an emergency fund, I recommend putting your tax refund check towards one. We have 12 months of expenses saved up in a CD ladder (check out the best CD rates) to maximize the interest we can earn risk-free. An emergency fund is a financial necessity, especially in our tough economic times, because it can help you weather all the potential problems you might face in the future.

Remember, never put your emergency fund at risk. Don’t put it in the stock market and don’t borrow from it for non-emergency purposes. The only reason you should be touching the funds is if you have an emergency.

Pay Down Debt

If you already have an emergency fund and you have some credit card or other high interest debt, consider putting all or some of your refund check towards paying the debt. High interest debt is akin to wearing an anchor around your neck. You don’t want your debt making decisions for you, right? So Your financial progresses is slowed or even stymied by debt (it’s hard to get a mortgage when so much of your income goes towards a high interest credit card debt that may take years to shed)

Why should you save for an emergency fund before paying down debt? In the current economic climate, you may not be able to accumulate more debt in case of emergency so having that fund in place is crucial. Over the last year or two, we’ve seen credit card companies slash credit limits in an attempt to lower their risk. By boosting your emergency fund first, you don’t risk losing unsecured credit at a time when you might need it most.

Or, if happiness is what you seek, giving away your money could be the key to happiness.

What are you planning to do with your tax refund check?

{ 44 comments, please add your thoughts now! }

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44 Responses to “How to Spend Your Tax Refund Check”

  1. Wise Finish says:

    With the Energy Star (Stimulus) rebates going on right now, it’s not a bad idea to consider spending it if you have some broken (or nearly broken) appliances. Then unload the old ones on Craigslist!

    • Soccer9040 says:

      I’m pretty sure you have to recycle them. And by recycle, I mean, they render it useless so you can’t sell it or use it again. With the cash for clunkers, they poured something in the engine to lock it up so it would never run again.

      The program is designed to take these clunkers off the streets and this was a way to ensure they would never be used again.

  2. tmartin says:

    I put mine straight towards a future house down payment!

  3. thomas says:

    If only I got a refund. Better to owe than give a free loan!

  4. Jenn says:

    Normally we each get about $500 refunds. This year we did a large last minute contribution to our tax deferred retirement accounts. Mostly we used cash ($7k), but did need a little extra ($3K) so that went on the LOC.

    As a result of that $10k contribution my hubby will get a $4k refund because it dropped him down a tax bracket. So, first we’ll repay the $3k put on the LOC. The rest of the refund will be the first contribution to the 2010 retirement savings. For 2010 we may have his contributions automated and the tax adjusted so he gets virtually no refund. The trick will be to consciously use the reduced tax on each pay rather than let it get sucked into daily spending. A lump sum refund forces us to evaluate where it goes. A few dollars a week doesn’t necessarily draw the same attention.

    My retirement contributions are done (mostly) through my work with a company match on the first 6%. My taxes are adjusted at source so I normally won’t have much of a refund related to retirment contributions. I’ll be getting about $1.5k back as a result of deductions for some daycare, kids sports fees and a small extra retirement contribution not done through my work. My refunds always go directly toward the mortgage. The date for our early retirement is largely tied to when the mortgage is paid off, so that’s a priority. We are on an excellerated payment schedule, with the payments increased from the required, plus every few weeks I skim off any excess cash accumulating in our bank account and send it off to the mortgage. Every little bit helps and I’d rather send multiple small extra payments rather than waiting until we’ve saved up a larger amount. The sooner we send it the sooner it has an effect. Our mortgage company doesn’t care how many extra payments we send as long as we don’t exceed the annual limit for additional prepayments.

    Our LOC balance is normally zero so seeing that $3k there, even for a few weeks is irritating. The interest on it(prime + 2%) will only be a few dollars for the few weeks it’s there, but it made the difference in getting him down a tax bracket and a much larger refund.

  5. aua868s says:

    invest in index fund!

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