Two Ways To Wisely Spend Your Tax Refund

Start or add it to your emergency fund.

You should do this first if you don’t have at least $1000 in your emergency fund. One great place to put it is in a high interest savings account, some of which are several times higher than many brick and mortar banks.

There’s also HSBC Direct and EmigrantDirect. If you have less to deposit, then don’t worry. You’ll still have your money grow faster than if you leave it a regular savings account.

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How can you save additional money for an emergency fund?

Look at your package deal for cable, phone, and Internet. Call your cable provider, such as Time Warner Cable and Comcast, to see if they can give you a better rate. It works sometimes, but if they don’t, then consider cutting back on the cable package for a month or two, just to get your emergency fund started. You may not notice a big difference and keep the change. Either way you can save $30-50/month for this and that’ll help with your fund.

Examine your cell phone plan. Can you change your plan? With Alltel you can change it without getting an extension on your contract. I’m sure about the other plans.

Look at your land line plan. It didn’t make sense for my husband and I to have a land line AND our cell phone plans. So far, so good. If you must have a land line and a cell phone, you may want to take off long distance with your land line.

Compare insurance companies for auto insurance rates. I saved $50 a month on car insurance for the same amount of coverage. Shopping does pay off. Just make sure you’re given a policy that can comfortably cover you and your situation.

Go during happy hours when you decide to eat out. I know that many college students hang out as a part of the cultural, so it would be impractical to tell you stop going out, but at least save money while you’re there. There a great place down the street that offer 50% drinks and has 50 cent tacos. So we plan our eat outs around that time (4pm-7pm). It’s still just as fun, but a lot cheaper.

Suze Orman caused a bit of a stir by advising people to pay minimums on their credit cards until they have eight months saved. The point taken for me is that socking away some money in these uncertain times can be a wise move.

Pay down your credit card debt.

Congrats if you have some money leftover from #1 to put towards paying down your debt. This is a step that can make you feel better as your debt shrinks. Depending on the size of your bonus you can completely eliminate your credit debt out take a chuck out of it.

You can tackle it one of two ways:

1. Go after the small debts and feel great about knocking them out completely. This debt snowball method could give you a psychological incentive to continue. Dave Ramsey notes that many problems can be overcome by psychology.
2. Put it towards the highest interest debt and gain a financial advantage. If you’re looking at a strictly numbers standpoint, this is the logical choice.

Choose a method that will work best for you.

How do you do get rid of debt?

Stop using credit cards. Hide them or perform a plasticomy.
Discover the exact amount of debt you’re in. You can’t come up with a plan until you know what you owe.
Work to see if you can lower your interest rates. If you can’t, you may consider choosing a 0% card to transfer your balance. Balance transfers are a temporary fix and do not address the root problem.
Control your spending and write a simple budget.
Automate your bills and put aside some money for savings.

Do you have any tips or plans for your tax refund?

Photo Credit: Crystl

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{ 5 comments… read them below or add one }

1 Baker @ ManVsDebt April 8, 2009 at 3:10 am: Great post! We are going to use our tax refund to help with our move to Australia. In a sense, it will be an emergency fund of sorts. It will help buy us some additional time if we are unable to secure employment right away!

2 Craig April 9, 2009 at 1:29 pm: I am currently figuring out what to do with my refund when it comes, which should be about $1400. I am young, have no debt, or other financial responsibilities other than myself. Have some savings going and a small vacation fund set up. I do not have an IRA and am thinking about setting one up and putting all the money into it.

3 Green Panda April 10, 2009 at 7:46 am: @Baker: Wow, sounds exciting. Send some pictures!

@Craig: Having an IRA started is a great idea. If you decide on mutual funds, make sure the expense ratios are low.

4 Jim Leigh April 10, 2009 at 10:27 am: I paid down my credit card debt and added to my savings for my house. I know most people consider this free money, but you should really make it work for you. Help yourself out and pay down some debt! Also, by buying a house this year, we will be getting the $8,000 tax credit. It just so happens that we have $8,000 left to pay on our car. So, if you think of it, an $8,000 ‘investment’ will be freeing up about $270 a month! ($3240 a year) for the next three years. Pretty cool…

5 Ray June 16, 2009 at 4:45 pm: We used our our tax refund to pay for some part of the wedding and some new housing expenses.