Receiving your refund is a great feeling. In the end, its your money, you just didn’t have it. What to do with the money is the question. There are an infinity of things you can do with your money. But, and I know this is something you always hear, the best thing you can do with the money is to save it or use it properly. It might not be as much fun as many other options, but it will certainly go a long way towards improving your personal finances. Here are some recommendations, according to Laura Adams, a financial expert, on what to do with your tax refund in the order of priority:
* Add it to your emergency fund. One of the most important defenses you have against unexpected expenses or the loss of income is a cushy emergency fund equal to at least six months worth of your living expenses. If you don’t have a reserve fund or if it’s not as big as it should be, make sure that’s the number one priority for your tax refund!
* Purchase health insurance. If you don’t have health insurance, consider using your tax refund to pay premiums for an affordable policy, such as a high-deductible plan. That’s the kind of policy that also gives you the ability to open up a tax-advantaged Health Savings Account.
* Pay down high-interest debt. If you have at least a few months worth of living expenses saved in an emergency fund, but also have expensive consumer debt like credit cards, retail store cards, or payday loans, use your tax refund to pay them down.
* Fund an IRA. If you don’t have an IRA, which stands for Individual Retirement Arrangement, use your tax refund to start one. You can contribute up to $5,000 to an IRA in 2010, or $6,000 if you’re age 50 or older. Be aware that there are tax penalties for withdrawing money from a retirement account before the age of 59½. So be sure to put money in an IRA only after you’ve established an emergency fund and are sure you won’t need the money.
* Fund a 529 Education Savings Account. If you’re saving money for your own education or that of a child’s, consider putting your tax refund in a 529 plan. Funds in a 529 grow completely tax-free if you spend them on qualified education expenses. You can learn more about 529s in one of my previous posts and at SavingForCollege.com.