What to Do with a Tax Refund

Tax refunds have started rolling in. Although the IRS told us not to expect our until mid-April, they actually sent it already. I quickly transferred that baby to our savings account where it will earn a few pennies until we start buying furniture.

This year’s refund is expected to average $3036. So what should you do with it? Here are a few tips:

Pay Off Debt

If you carry credit card debt, it’s very important that you pay it off. Although credit card issuers are now curtailed from shenanigans, it’s very likely they snuck in several rate hikes before the new rules went into effect. According to BillShrink.com, if you took your $3036 tax refund and put it against your credit card debt, you’d avoid $2810 in interest fees 5 years. Meanwhile, it would take you 44 years to save that same amount in a savings account at today’s high of 1.5%.

Upgrade Windows, Doors, and Energy Efficient Appliances

This year there are additional tax credits for weatherizing your home or installing energy efficient appliances, windows, and doors. If you’re in need of a new furnace or new windows, this is the year to put your tax refund to good use, and get a little extra in your next refund as a bonus!

Boost Your Emergency Fund

If you don’t have debt and don’t have any appliances or windows in need of upgrading, just deposit that baby into your emergency fund. I’m sure something will come at some point and you’ll need that money. Trust me, it might not be this year, but it will happen eventually.

Put It Into a Retirement Fund

If you have a 401K match through your employer and aren’t currently getting the full match, increase your retirement withholding to at least meet the match, or the amount of your tax refund, whichever comes first. Since you have the money in the bank, you won’t miss it in your paycheck. If you don’t have a 401K match or a Roth 401K, open an IRA or a Roth IRA with the money. Every little bit helps.

Open a CD Ladder

CD laddering is a way to get higher interest rates on savings, but always having some money close to being liquid. Basically, take $1000 and buy a one-year CD. Take another $1000 and buy a two-year CD. With the last $1000, buy a three-year CD. Spend the remaining $36 on something fun. These days, that’s probably one movie ticket and bucket of popcorn. At some point you’ll want to buy $1000 four and five-year CDs. Then, as each one comes due, roll it into a new five-year CD. So, you’ll have a portfolio of five five-year CDs, but one will always be due within the next 12 years in case you need the money.

Of course, you can also use the money for any pre-planned purchases you’ve been saving up for. In my case, that’s furniture and at some point this year a new car. For other people, it might be a vacation they’ve been squirreling away money for. Whatever you do, make a plan for your tax refund before you spend it. If you just deposit it into your checking account, it will quickly vanish on this and that. That’s now way to treat your money.

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