What Should You Do With Your Income Tax Refund?
July 6, 2008 · Print This Article
Due to 2008’s economic stimulus package, more Americans expect a sizable income tax refund than ever before. While that may seem like free money, remember: it’s actually just money that you’ve already earned and given to the federal government in excess of the current tax laws. This year, the government is giving additional refunds to compensate for the recent economic crisis, but it’s still essentially your money. Take care to spend it wisely.
What are some of the smartest ways to spend your income tax refund?
If you have credit card debt or other outstanding debts with high interest rates, this question should be a no-brainer. The more you owe to credit card companies - and the longer you are indebted - the more money you are losing. Remember that credit cards have absurdly high interest rates, such as 16%. That is way above the U.S. Prime Rate. If you use your income tax refund to pay off a large chunk of your high-interest debts, you may save up to 30% of your debt a year in interest charges.
If you don’t have any outstanding high interest debts, then investing your income tax refund is another wise option. In particular, think about contributing to your own retirement account. IRA accounts can be opened at your bank, your broker, or with a mutual fund, and you can convert the money in the account into whatever form you want: stocks, mutual funds, government bonds, or certificates of deposit.
Even if you are young, contributing to your retirement account is a good idea, counterintuitive as that sounds. The longer the money stays in the retirement account, the more it grows, and the sooner—in theory - you can retire. Plus, putting money in an IRA account gives you additional tax benefits. Traditional IRA contributions are tax-deductible, while contributions to a Roth IRA account are not tax-deductible but can be withdrawn tax-free when you are ready to use the money.
Additionally, 2008 is the perfect time to start your own emergency fund. Money in an emergency fund is very useful indeed when an unexpected event comes up. For example, the loss of a job, or an unexpected, costly medical procedure, or the sudden death of a family member. Such unplanned-for catastrophes have driven many to despair and bankruptcy, or at least expensive, high-interest debt from having to take loans on short notice. This needn’t be you. Put the money from this year’s income tax refund into a savings account, a money market, or make a time deposit, and peace of mind will be yours.
Finally, if you own a home that you haven’t finished paying the mortgage for, this year’s tax refund is your perfect chance to make that extra payment. As with credit cards, you will save a fair amount of money because you will be paying less in interest over time. Plus, not only will you be that much closer to eventually completely owning your home - you’ll also get more equity the moment you make the additional payment.
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