That’s what you might think when you first see your IRS tax refund check. Into your head pops an image of that new big-screen TV. Or it might bring to mind a trip to the nearest casino. Perhaps you see yourself lounging on the deck of a cruise ship bound for Greece.
But hold on. That “free money” that’s firing up your imagination came out of your own pocket.
A tax refund is really just a return of the money that you generously loaned your federal government over the past year. According to the IRS, the average tax refund as of April 3 was $2,815. That’s a big chunk of change.
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Perhaps it deserves more bang-for-the-buck than the instant gratification a major purchase can provide. Here are some suggestions for those who want to be thoughtful about how their tax refund check is spent:
▪ Pay down your debt. If your refund arrives and you are still struggling with bills from the holiday season, that’s a sure sign that your debt needs some attention.
If you have multiple credit cards, consider paying off the one with the lowest balance first. That can motivate you to work harder on your debt issues. Possibly you can also make a sizable payment on another card as well.
Does one of those cards have a high interest rate? That one might be your first target for paying down.
Think about your car loan or any other debts. Above all, resist the trap of telling yourself those payments are low and you may as well stretch them out. The interest on those debts continues to build. Here’s your chance to put a big dent in it.
▪ If you’re looking to buy a home or a new car, that tax refund check can help with your down payment. That saves you interest in the long run.
Perhaps you have a child’s future college fund that you can contribute to. Long-term goals are worth considering when it comes to making that tax refund work hard for you.
▪ Put the money back into your home. Home improvement projects will lead to an increase in your home’s value. Whether it’s sprucing up a kitchen or bathroom or improving energy efficiency with new windows, your tax refund will give you dividends down the road when it’s used to increase the worth of your house.
▪ Contribute the money to your family’s emergency fund. It may not sound like a very “high prestige” way to use your check, but an emergency savings fund can give your household a little wiggle room in the event of an unexpected budget crunch.
Financial disasters seem to be increasingly common in today’s world. Experts say you and your family should have between three and six months’ living expenses socked away for such an event. There is no value you can put on the peace of mind that having such a fund can give you.
▪ Finally, if you have been getting sizable tax refunds, you probably should adjust your withholdings. Who wouldn’t want a bigger paycheck?
Update your W-4 with your employer and try to reach a “break even” point where you are not overpaying the IRS. More money for expenses throughout the year is always a welcome thing.
Enjoy your tax refund if you’re among the many Americans who receive one. It’s worth keeping in mind, however, that you have several options when it comes to putting that money to use.
Denise Groene is the state director of the Better Business Bureau of Kansas. Contact the bureau at 800-856-2417 or bbbinc.org.