Tax Refund: Spend, Save or Blow?

Apr 16, 2014 by

Tax refundIn the personal finance blogging world, the annual parade of advice on what you should do with your tax refund is well underway. If you’ve managed to stay awake through even a few of my articles, I think you can probably guess at my suggestions, but I’ll make them clear anyway. For the record, and in order of priority:

  1. Pay down debt, no matter how tiny the interest rate and how silly your financial advisor says you’d be for missing out on the wonderful returns he or she can earn for you if only you’d turn over your tax refund (and all the rest of your money) to him/her and Wall Street! Should you apply your tax refund to your mortgage or other low-interest debt instead of investing it? My views on this hotly debated question are here.
  2. Save, especially in a tax-advantaged account like an IRA. Using a chunk of money like a tax refund is also a great and nearly painless way to jump start an emergency fund or other planned savings fund. Are you still paying for last year’s holiday spending, with interest? Here’s your chance to make sure that doesn’t happen in 2014!
  3. Don’t blow your tax refund. Many people seem to regard tax refunds as “found money,” not quite grasping that refunds are their own hard-earned money they’ve just newly discovered because, instead of filing a new W-4, they let Uncle Sam keep their money for his own use over the past year. Generous, but not exactly savvy. With this self-deception firmly in mind, these folks trot off to the casino or invest in a few more inches of flat TV screen or indulge in some other financial stupidity that they’d never do with money from their paychecks. But by deluding themselves into thinking a tax refund—which is the excess money withheld from the past year’s paychecks—somehow differs from the money not withheld from their paychecks, these unfortunates trick themselves into spending more than they can afford.

How will you use your tax refund?

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