Tax Refund Savvy: Do's and Dont's of "Extra" Cash

Sunday, 05 February 2012 00:00 Written by Savvy Girl

If you clicked on this article, I assume it's fair to say that you are expecting or have already received a tax refund. On the one hand, I wish to congratulate you heartily because nobody likes owing money at tax time.

On the other hand, savvy friends, consider this a stern (but loving!) "tsk, tsk." The reason? If you're receiving a refund, you're having too much withheld from your paycheck and have essentially given Uncle Sam an interest-free year-long loan and while that's awfully nice of you, it's more than Sam would do for you, n'est-ce pas? So, before you order up that new iPad, here are a couple savvy tax time "do's" and "don'ts" to help you get your money working better for you, not Uncle S.

Tax Refund Savvy: What to Do (and Don't Do) with Your Tax Refund

Immediate DO: Check with your Human Resources manager to find out how to have less withdrawn from your paycheck. If you got the national average tax return of $3,000, that's almost $300 a month you could be investing and putting to good use!
If you have any debt, DO pay it off immediately with your refund. With most credit cards charging 18% interest, carrying credit card debt from month to month is a savvy-free proposition, especially if you could have had the money to pay it off all year long.
If you don't have any debt, DO build up your nest egg. Everyone should have 3-6 months of expenses lined up in a high-interest savings account for emergencies.
If you don't have debt, already have a decent nest egg (3-6 months of expenses is ideal), DO start investing in a moderate-risk mutual fund or an IRA. Once you have less deducted from your paycheck, assuming you are maxing out on your 401k contributions, put the extra money to work in your mutual fund or IRA.
If you absolutely MUST spend some of your tax refund, DON'T blow the whole wad. It's okay to splurge after you get that big check from Uncle S., but not more than 5-10% of your total amount. Remember, that "extra" money isn't a windfall, it's money you earned over the past year and just lent out for free. Tsk, tsk!