Alright, there really is no found money, per se. However, if you are getting a tax refund from the IRS or your state taxing authority, you can certainly think of this as “found money”. It’s money that you did not have. Here are somethings that you should do with the refund, and they do not include spending it on frivolous items:
Pay Down Your Credit Card Debt. This year paying off credit card debt is more important than ever. Now that interest rates are beginning to rise, credit card companies are boosting what they charge in interest for unpaid balances. The average is around 15%. There is no better investment than to use a tax refund to pay down your credit card balance. That’s like earning a 15% return on your money!
Boost Your Retirement Savings. Let’s say you are getting a $3,500 refund this year. Invest that in a Roth IRA that earns an annualized 6% over the next 20 years and your tax refund this year will eventually be worth more than $11,000. You can’t tell me tripling the value of this year’s tax refund isn’t a great deal.
Be Ready for Emergencies. It is so upsetting for me to read the surveys that say a majority of Americans don’t have $1,000 or so set aside to deal with emergencies. This is your chance to start an emergency fund, or top off a savings fund that doesn’t yet equal eight months of your living expenses. Just think of the peace of mind that will come when you know you have more money set aside for dealing with life’s what-ifs.
Remember, a large tax refund is not necessarily a great thing. If you are getting a large refund, you have in essence providing the federal and state with interest free loans. Adjust your withholdings, so you will get more during the year, which you should apply to any debt you have. Of course, this means you won’t have a large refund the following year. However, you will certainly have more money during the year.