Smart Money outlines six ways to spend your tax refund. All are good options indeed.
1. Create a Cash Cushion. With unemployment at a 25-year high you need at least a six to nine month emergency fund to cover living expenses until landing a new job.
2. Pay Off Debt. With credit cards charging 18-30% interest this is the best return on your investment. Just don’t charge more.
3. Fund Your Retirement. Hopefully you’re employed and contributing the maximum to your 401K at work. With any excess, fund a Roth or traditional IRA. You can borrow for almost anything in life, however NO one will loan you money to retire.
4. Save for College. If your children are still young, investing in a 529 plan can earn returns large enough to keep up with rising college costs. Consider more conservative options like FDIC insured CD’s if your kids are within a few years of attending college and will need the money sooner.
5. Invest In Yourself. Competition is stiff. Whether you are unemployed or worried about being the next to lose your job, now is the time to freshen your resume, sharpen your interviewing skills and take an extra course or two to give yourself that extra edge. Perhaps invest in a career coach to help.
6. Splurge a Little. This is usually the first place people want to spend their tax refund. The other options might pay better dividends, but if you’ve covered your emergency fund and paid down your debt, a little splurge might be in order. Retails sales are excellent now and bargain-basement travel deals abound.
However, if you’re really serious about conquering your debt and using your money wisely, why would you give anyone, much less the federal government, an interest-free loan every year?
The average tax refund so far this year is $2,740 according to the latest IRS statistics. If you are getting a refund change your W-4 today. Keep more of your own money every month. And if you really want to loan Uncle Sam some of your money, buy I BONDS instead. The bonds, which pay a combined fix rate and an inflation rate, are paying 5.64% until the end of April. The two combined rates adjust every six months, but who thinks inflation is going down? Go to www.savingsbonds.gov to see if they are right for you.