Getting a tax refund can be a great thing or a bad deal depending on whom you speak to. Financial Samurai was sharing his take on tax refunds and I agree with him. While some may complain you’re giving the government your money interest free, if the alternative is you spending the money on frivolous things , then it’s worth having it in a lump sum. For some people, having a tax refund motivates them to spend their money a little more seriously.
Consider using your tax refund to build your finances.
Maximize Your Tax Refund’s Potential
If you’re getting a big refund, look at it as a chance to improve your finances with a big shot.
Create a bare bones emergency fund. Before you do anything else, you should have a barebones emergency fund. How much is that? For most college students and new graduates, I say it’s somewhere between $500 and one month’s worth of essential expenses. You can build it up through out 2010 with automatic deposits.
Pay off a high interest credit card. If you’ve created an emergency fund and have some money left, then go ahead and pay off a credit card if you can or at least pay a big chunk off. Even if you only manage to pay off a small store credit card you’re giving yourself a big win. You can work on your debt snow ball during the rest of the year.
Deposit the remainder into a Roth IRA. Why should you care about a Roth IRA while you’re in college? Starting an IRA even with $500 has some big consequences thanks to the power of compounding interest.
Spend 20% on What You Want
Despite all the smart financial choices you can make, it doesn’t mean you can’t have some fun with it. You should keep 20% for yourself. The catch is you have to wait a month before you use it. Why?
Waiting at least a month can give you time to really figure out how you want to use the money. Do you want to travel? Do you want to save money for a TV? Do you want to donate that money to a charity or a family member dear to you that‘s in need?
Only you know what will give you the most fulfillment. Just don’t squander it away quickly.
Your Take
Which method do you prefer? If you like receiving a bigger tax refund, how do you spend it? What advice do you have for the size of a bare bones emergency fund?
Photo Credit: NickStarr
