If you are among the people who had too much taxes withheld and you are getting a refund, congrats. I owe taxes because of my “all-1099” status all year, and even with paying estimated taxes every quarter, I still owe money! When I was working for the man I always tried to break even on my taxes, so that I did not get a refund or owe any money – that way, they didn’t get to keep my money all year and I didn’t have to come up with anything at the end of the year. But this year, I bet everyone would enjoy getting a tax refund with the way the economy is! If you are getting one for the 2008 tax year, this is not the year to blow it on wasteful spending, but rather give some thought to your overall financial health right now instead. In these times, is there something else you should be doing with your money? Let’s take a look at a few options:
Pay Off Debt
This should be priority #1 if you are getting a tax refund. Credit card companies are changing their interest rates, terms, and special offers, which could leave you high and dry paying an astronomical interest rate on your credit card debt. Using your tax refund to pay off debt is a very simple way of getting a guaranteed return on your money. Imagine yourself with less (or better, no) credit card debt – feels good, right?
Contribute/Top Off Your Emergency Fund
If you do not have an emergency fund but still carry credit card debt as well, I would definitely use some of your tax refund to fund a small emergency fund. (Then use the rest to pay off debt) Emergency funds enable you to breath a little sigh of relief that if something small came up (car accident, unforseen doctor visit, etc), you can pay cash for it instead of charging more debt. If you are not carrying any debt at all, I would put my entire tax refund into my emergency fund. Why? People are getting laid off left and right, and knowing you have some backup money just in case can definitely ease some of your anxiety about what may happen.
Fund Your Retirement Account
Already paid off your debt and have a sizable emergency fund? I would put that refund into my retirement account then. I know a lot of people (myself included) have lost quite a bit in the market, but it will come back eventually. Depending on your age/proximity to retirement, this choice might differ, so I would ask a professional for their advice. But for me, I would be adding to my Roth IRA and Solo 401K for the year.
Give To Charity
Right now, there are millions of people lined at shelters, soup kitchens and for food stamps. You could always give a small cut of your refund to help out those who need the most help in these pressing times.
Spend It On Your Family
Take the family on a vacation; there are deals to be had right now. Need a new car? Consider using your refund as the downpayment on the hundreds of cars available at 0% interest right now. Keep the money to send your kid(s) to a cool summer camp. Really think about where and to what that extra money could make the biggest difference and have the most affect on those you love.
Are you getting a tax return? What are you planning to do with it? I think the biggest thing people used to do with them was to go shopping, but I do believe that times have changed. So I am curious as to what you think…let me know in the comments!