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How to Spend Your Tax Refund Check

Posted By Jim On 02/18/2010 @ 7:01 am In Taxes | 44 Comments

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 [3] 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 [4] or put it in savings? (CD rates [5] 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 Proven├žal Rack of Lamb [6], 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 [7] (check out the best CD rates [5]) 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 [8].

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


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/how-to-spend-your-tax-refund-check.html

[3] average tax rebate check: http://www.bargaineering.com/articles/average-tax-refund.html

[4] credit card debt: http://www.bargaineering.com/articles/what-is-the-average-household-credit-card-debt.html

[5] CD rates: http://www.bargaineering.com/articles/best-cd-certificate-of-deposit-rates.html

[6] Proven├žal Rack of Lamb: http://www.bargaineering.com/articles/homemade-provencal-rack-of-lamb.html

[7] CD ladder: http://www.bargaineering.com/articles/bvc-4-certificate-of-deposit-ladders.html

[8] giving away your money could be the key to happiness: http://www.livescience.com/health/080320-happiness-money.html

Thank you for reading!