5 Things To Do With Your Refund
Here are some of my key ideas for what to do if you find yourself about to get a significant income tax refund:
1. Buy yourself something nice! Strict disciplinary principles typically don't sit well with most people. So, telling you to take all of your money and be financially prudent with it probably won't help you much. I really do believe that for most people, treating themselves to something nice is a good strategy -- just don't overdo it! Pick a percentage to use this way (maybe 10-15%) and have some fun with it.
2. Build or shore up your cash reserves. Do you ever feel like you're living paycheck to paycheck or that your cash reserves are always uncomfortably low? Well, getting an influx of cash is a great way to fix this. Typically, I recommend having an emergency fund of 3-6 months' worth of your committed expenses. Set this aside in a separate account from the one you use for your day-to-day finances and bill paying.
3. Pay off consumer debt. If you are one of the millions of Americans with credit card debt, this could be a good opportunity to clean the slate (or at least part of it). If you have multiple cards and can't pay them all off, consider paying off the smaller balances first to give you a sense of accomplishment.
4. Create cash pools for upcoming expenses. My family has many things on which we know we will spend money this year -- vacations, sports, gifts, travel, etc. If you have similar known expenses upcoming, why not set aside pools of cash specifically earmarked for these purposes? This way, your cash flow won't be as stretched when the time for the expense arrives, and you'll be more likely to stick to your planned spending amount. I literally set up separate savings accounts for such things.
5. Roth IRA. Do you have a savings goal you've been meaning to reach but just couldn't get excited about putting away a small amount of money each month? Dropping a lump sum into such a plan often makes it easier to get over the initial hurdle of getting started.
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