5 Ways To Use Your Tax Refund

Posted in Tax , Tax Returns • April 23, 2010

Tax Refund

Ryan Guina is an entrepreneur and writer. He has worked for Fortune 500 companies and served six years in the USAF. He writes about money management and small business topics at Cash Money Life and military money topics at Military Finance Network. You can follow his twitter feed.

Tax day has finally come and gone, which is a relief to millions of individuals, myself included! The average tax return was over $2,700 and if you were one of those fortunate souls to receive a tax return this year, then you should think twice about dropping it all on a new home theater system. Here are some tips about how you can use your tax return to set yourself up for a better financial year!

1. Pay any overdue bills

Overdue bills are bad for several reasons – mostly because they incur nasty late fees and penalties, and they can also wreak havoc on your credit score. If you are overdue on any bills, use whatever means you have to get current.

2. Build your emergency fund

An emergency fund is an important part of any healthy financial plan. You never know what will happen and when, and having an emergency fund can help you avoid going into debt.

If you are just starting your emergency fund and have other debt, then work on building your emergency fund up to $1,000 or $2,000, then work on paying off the rest of your debt. If you have no other debts, other than a mortgage or other low interest debt, then work on building your emergency fund up to 3-6 months of living expenses. That will give you peace of mind and the ability to work on other financial goals.

3. Pay off high interest debt

Being in debt is no fun, and it’s no way to build a financial future. Instead of building wealth for yourself, you are building wealth for someone else. There is no magic bullet to eliminate debt, but there are some effective tips for how to get out of debt.

Start by paying extra money on your high interest loans to reduce the amount of interest you pay the lender each month. The more you pay toward your principal each month, the less interest you will have to pay.

4. Invest

If you are caught up on bills, have a solid emergency fund and no debt, then you should get that money working for you! Compound interest will help grow your money and over time, you can build a comfortable nest egg. Be sure to examine your investment goals and invest accordingly – short term, long term, retirement, etc.

If you haven’t started yet, now is a great time to make the resolution to invest.

5. Have a little fun

I would be remiss if I were to tell you you need to follow these tips to the letter. After all, this is your money. It would be difficult and somewhat disheartening to take a $2,700 check and put it all toward one goal without “seeing” any other benefit from it. And that’s not what I recommend. It’s great if you can do it, but it’s also great if you use a strong portion of your return for one of these goals and also use some of the money for fun.

So instead of dropping $2,700 on a home theater system, consider using the majority toward one of these financial goals that will have a major impact, then use a small portion for other fun things. Maybe just buy a flat screen TV instead of the entire home theater. Or maybe take a family getaway for a couple days.

The final decision is up to you. But if you have the opportunity, try to do something productive and something fun.

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