If you’ve already filed your taxes, chances are it’s because you are getting a tax refund. In 2011 the average return was more than $2,700. What do you do with a few extra hundred dollars or maybe even a few thousand dollars? Most people’s paychecks are pretty much spent soon after payday, but here is a big, uncommitted pile of money. Is it time to call your travel agent and book that vacation to Hawaii?
Many financial experts advise people to have an emergency fund equal to three-to-six months of expenses. For many households that means $10-$15,000 sitting in the bank. Your tax refund can really help bulk up your emergency savings. Unless you know the secret to never going to the emergency room, never having a major home appliance give out, or never getting a bill from your car mechanic that could cause a heart attack, you need an emergency fund. People lose jobs. People get sick. Cars break down. An emergency savings account is really emergency insurance. Without it your emergency problem also becomes a money problem.
Already have an emergency fund? Before you shop for that perfect Hawaiian vacation swimming suit, consider using your tax refund to pay down debt. Boring С I know. Yet boring has benefits. Many people make it a goal to pay off all their consumer debt and more often than not, they seem to be able to do it in fewer years than you would think possible. Just think, with no car payment, student loan payment, or credit card payments, how much more money would you have for a really nice vacation?
If you’ve paid off your debts, it’s still not time to take hula dancing lessons. You need to make sure you are adequately funding your retirement. Assuming the government gets its act together and figures out how to sufficiently fund Social Security for future generations, it’s still not a lot to live on. Many financial experts advise people to allocate 15 percent of their income each year for retirement investments. The best investment strategy is to start early, the longer you wait, the less time you have for your investments to grow into a nice retirement source.
Do you have children you plan to help with college expenses? You can reduce the sticker shock if you start saving money for college before college starts.
Now, what if you have your emergency fund, no consumer debt, an adequately funded retirement plan, and money set aside for college? Ho’omaika’i! That’s Hawaiian for “congratulations.” Enjoy your Hawaiian vacation.
We want your comments! What are your plans for your tax refund?