Will You Spend Your Tax Refund Wisely?

Tax season is here, and you are probably gathering your W-2s, 1099s and other documents to file your taxes. While the process of submitting returns can be tedious, many people look forward to receiving a sizable refund from Uncle Sam.

I’m planning to use my tax refund toward the purchase of a new car. Fortunately, I don’t have debt to pay off, so I’m also setting aside some money for entertainment and clothes. Some people may think that this is a bit irresponsible, but there is nothing wrong with treating yourself once in a while as long as your finances are in order.

There are three main questions to answer before spending your refund on you:

Do you have credit card debt? If you do, it’s smart to use your tax refund to eliminate credit card debt. Putting a hefty sum toward these balances may not only help chip away at the amount that is owed, but also make it easier to pay off the remaining amount by reducing the interest charges that are applied. Also, consider putting your refund toward your mortgage payment.

Do you have a savings funds for emergencies?
If you don’t have credit card debt, you may feel more confident about spending your refund, but there are other personal finance areas you should also examine. Studies show that a large percentage of Americans don’t have a separate savings fund for emergencies. Many would be forced to turn to credit, savings or their retirement funds to cover unexpected costs in the event of a crisis. To avoid this scenario, you should consider using your tax refund to start an emergency fund. Most professionals encourage individuals to save enough money to cover roughly three to six months worth of expenses.

Did you start your retirement fund yet? Many Americans are in danger of facing a retirement shortfall as they near their golden years. So, starting early and putting a tax refund toward a retirement account can be a smart way to lower the risk of outliving savings. You may choose to open a Roth IRA with your funds or investing in the stock market. Placing the funds in a high-yield savings account is another option if you already have a 401(k) in place through your employer.