Wednesday, April 2, 2014

What To Do With Your Tax Refund

If you are getting a tax refund this year, consider using it to invest in something with a guaranteed rate of return.  I'm talking about putting that money towards your debt!

If you receive a large amount of money this tax season, whatever money you put towards your debt is guaranteed to give you a return equivalent to your interest rate.  See here and here.

In order of priority, here are some ideas:
  • Apply the refund to your debt with the highest interest rate, which usually tends to be credit card debt
  • If you have money leftover, then use the remainder to apply to other debt based on whichever has the highest interest rate, as that will give you the highest rate of return.  
  • If you still have money left over after you've paid off any outstanding debts - congrats!  You should either invest that money or add it to your emergency savings.  
  • Once your emergency savings is up to a level that you feel comfortable, you can then put that money towards your savings goals, such as an upcoming vacation.
Other options are to invest it in stocks or an index fund, but of course, with the potential for greater rewards comes greater risk.  Also, if it gives you peace of mind to pay off smaller debts that don't necessarily have the highest interest rates, you can do that as well, as I understand that for some this provides a psychological motivator and can create a snowball effect.  But if you're looking at just what will give you the highest rate of return, then put that debt towards whichever debt has the highest interest rate.

I personally added my tax refund to my savings account, and I will use that money in April to help pay off another student loan.  Thanks Uncle Sam!

1 comment:

  1. I agree! Saving your tax refund or at least adding it to your emergency fund is a good idea. Putting the return you get to good use can be a great way to get back on track with your bills as well. In any case, there certainly are a lot of ways you can use the refund wisely. Thanks for sharing that! All the best to you! :)

    Wanda Hanson @ Tax Tiger