Taxes are due next Monday, April 15th – but you knew that already, right? If you’re expecting a sizable tax refund over the next few weeks, that’s not necessarily a good thing (more on why in a moment). And many Americans are expecting such a refund, since the average check from Uncle Sam is expected to reach $2,800 this year, according to Capital One’s Taxes and Savings Survey.
Regardless of the amount of your refund, instead of throwing the money away on a useless vacation, it’s time to adjust your financial priorities and make smart decisions once that check hits your mailbox. Here’s how:
1. Emergency Savings
We know how important it is to have an emergency savings fund. But a survey from Bankrate showed that 25% of consumers have more credit card debt than emergency savings! Regardless of whether or not you have credit card debt, you need to have $1,000 in your emergency savings account, as soon as possible for unexpected financial hurdles. Once you get your refund, take $1,000 of it and throw it into a savings account. Done!
2. Tackle your debt
After you’ve built up at least $1,000 in an emergency savings fund, all eyes are on your credit cards. If you pay double the minimum payment on your cards, no matter how much debt you have, you’ll be debt-free in roughly two years. To get out of debt even faster, pay triple the minimum payment each month on the credit card that has the highest interest rate, rather than the highest balance, since this is the card that’s costing you the most money.
3. Up your retirement savings
If you haven’t opened up a Roth IRA, do it now! It takes less than 10 minutes via online discount brokerage firms like Vanguard and T. Rowe Price. The maximum contribution limits for the Roth IRA in 2013 is $5,500 if you’re under age 50 and $6,500 for those over age 50. The Roth IRA, unlike the 401(k), allows you to contribute money that you’ve already paid taxes on – and you can withdraw your original investments at any time without penalties or fees. If you can, throw your entire tax refund into a Roth IRA, assuming you have no credit card debt and you have an emergency savings fund.
[Pre-order Scott’s upcoming book, MORE MONEY, PLEASE: The Financial Secrets You Never Learned in School]
4. Make your tax refund work for you
Look around your home to see where you can make some worthwhile investments that will pay for themselves over time. For example, installing and using a programmable thermostat will save you $100 per year on your energy bills. The device costs under $100 and even if you hired someone to install it, the savings in energy costs will make this a sound investment.
Or, you might want to replace an old furnace, which may cost a few thousands dollars, but after tax rebates and a credit from your utility company – and not to mention the savings from lower heating bills – the initial investment will be paid off in a few years.
5. Invest in yourself
Now that you’ve received your refund, it’s time to invest in you. Do you need new work clothes? Is the screen cracked on your smartphone – maybe it’s time for an upgrade? Investing in new clothes or technology are not frivolous expenses. They’re going to enable you to perform better at work – which will help make you more money. Don’t be afraid to also invest in courses or continuing education in your field to make you better at your job or that put you in a position to get a raise.
6. If your tax refund is too big….
If you’re receiving a tax refund (it doesn’t matter how much), that means you’re paying the government too much money throughout the year. You’re letting them hold your money and you’re allowing them to earn the interest. Instead, you want to keep more of that money in your wallet, that way you can earn the interest. This is especially important if you think you’ll feel tempted to spend your tax refund all at once on a vacation once you receive the refund. Having that tax refund divided up throughout the year might make you more inclined to save that money. To adjust your withholdings, file a new W-4 form with your employer – the IRS has a withholdings calculator on IRS.gov.