5 Plans for Your Tax Refund

by Joe Plemon on February 8, 2012

According to USA Today, the average tax refund last year was over $3,000.  If you are anywhere near average, you will soon have thousands of dollars in your pocket – money which will disappear if you do not have a plan for it.  Not everyone should have the same plan, but all should create a strategy which will mesh with their overall financial well being.  What is the best plan for you?  Read on.

  1.  If you have consumer debt, jump-start a debt snowball.  By using that $3,000 to get rid of your smallest debts, you will be able to make bigger payments on your remaining debts.  Continue to knock them off one at a time, from smallest to largest, and watch your debt snowball grow.  Note:  I would not include my house payment in this snowball.
  1. If your consumer debt is paid off, build your emergency fund.  Most financial planners recommend an emergency fund of at least six months expenses.  Therefore,  if your monthly spending budget is $4,000, you need an emergency fund of $24,000.  If you are not there, your $3,000 refund will definitely help.
  1. If you have no consumer debt and your emergency fund is in place, invest for retirement.  A good rule of thumb is to invest 15% of your take home pay for your retirement, so if you are not quite there, put that $3,000 to work.  In 20 years, at an 8% rate of return, $3,000 annually would grow to nearly $150,000.
  1. If you have satisfied steps 1-3 above, save for your children’s college.  Consider a Coverdale Educational Savings Account or a 529 plan.  Each has its own advantages, but both will earn tax free growth (as long as the investment is used toward a college education).  I like tax free, don’t you?
  1. If you have already satisfied all of the above steps, take a cruise.  Surprised?  Don’t be.  You are doing great with your finances, so loosen up and enjoy yourself.  You deserve it!

Bonus plan:  bring the money home each month.   Many mistakenly think that they somehow “win” when they get a refund from the IRS.  Not true.  A refund simply means that the IRS is returning your money after hanging onto it for a year. You can keep your Uncle Sam’s hands off of your money by upping the number of exemptions you claim on your W-4 form.  Doing so could give you as much as an additional $250 each month throughout the year instead of a $3,000 refund after the year is over.

Zig Zigler once said that those who aim at nothing will hit it every time.  Don’t let your refund vaporize…have a plan and follow it.  You will be glad you did.

Readers:  Are you expecting a tax refund?  What is YOUR plan?

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{ 5 comments… read them below or add one }

Thomas - Ways to Invest Money February 8, 2012 at 11:12 am

Nice post Joe and so true. I lot of people will end up with cars, tv’s and vacation money. Our refund is going to make sure we max out last years Roth investments. I am all for trips with whatever is left over from making sure savings and investments are taken care of.

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Joe Plemon February 9, 2012 at 12:37 pm

Well don Thomas. Always good to have a plan!

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Tim @ Faith and Finance February 9, 2012 at 8:25 am

With my wife in school, we’re getting quite a bit extra because of the lifetime learning credit. Gotta love tax credits :)

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Joe Plemon February 9, 2012 at 12:36 pm

Tim — You DO have a plan for that extra big refund. Right?

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Young and Thrifty February 11, 2012 at 11:35 am

The debt snowball!! Thats a good one. Most people are so anxious to reduce their large debts and forget about the small ones lingering in the shadow. Your tax refund has a better impact when you start with the smaller debts.

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