1. Chip Away at Mountainous Debt: Debt on which you're paying high interest rates and can never make more than minimum payments toward may feel like a mountain in the way of your future. If you've received a large tax refund, you could lower that mountain substantially and save yourself thousands in interest. Paying down that debt now could mean the difference between enjoying, rather than simply enduring, your financial life later.
2. Plan for the Future: If there's tax refund money left over after you pay off debt, think what you could invest in that could substantially change your future. Perhaps you'd like to finish college. Is a certification keeping you from a higher earning level? What maintenance would make a big difference if you had to sell your home? Think "long-term benefit" before you give in to instant gratification.
3. Beef Up Your Retirement Funds: Many of us lost money from our retirement funds in the recent recession. Depending on your retirement investment vehicle, you may be able to make a lump sum addition without tax implications. You can find tables online to determine whether some of that tax refund could benefit your retirement.
4. SAVE! How's your Personal Savings Rate? If you're like many Americans, you're trying to save more right now, but still don't have enough put away to stave off an emergency like unemployment. That nice, fat tax refund would look great earning interest, and might go a long way toward easing "what if" anxiety.
5. Balance "Want" with "Need": If you're determined to spend part of that tax refund on something other than what we've discussed, consider spending a small percentage on what you want and using the rest for what you need. Delayed gratification is, after all, the skill that's required to build wealth and avoid debt.
Receiving an income tax refund may have triggered reckless financial behavior in the past, but it doesn't have to this year. You have the ability to spend, save and invest responsibly, and this is a good time to exercise it.
Before the tax refund check comes, sit down and make a plan for how you'll use it. Try to prioritize how it's spent or saved by defining the long-term value. You'll soon find that taking charge of a windfall is a much better feeling than wondering where your tax refund went.
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