Like everything else, this depends on where you stand in your financial plan. If you have a bunch of debt — aside from a mortgage — and you are now trying to get on a plan to pay it off, then you need a starter emergency fund. It should be at least $1,000, not much more. You want to be putting as much money toward your debts as possible. The more you put toward the debt, the faster you will pay it off — logically.
If you don't have any debt, make sure your emergency fund is about six months of your total household expenses. If you don't have this much saved, use your refund to get it closer to that number.
3. Save or invest.
If you are out of debt — not including a mortgage — you can use your refund to fund some retirement accounts or your children's education or other funds (like an LDS mission).
Depending on the investment type, you could max out your contributions for the year using your tax refund and not have to worry about contributing the rest of the year.
I'm not an investment guy, either, so talk to your financial adviser or planner and find out what your particular contribution limits are and if you can use your refund to max those out.
4. Add to savings goals or fund a budget category.
If you are in the process of saving money for a specific big purchase, use your refund to either add to the savings fund or reach your savings goal. Maybe you are saving to buy a new couch that you've needed for a while or to put a new roof on the house. Your refund could be a good opportunity to speed up that process.
You could also use the tax windfall to fund a category in the budget that requires a monthly contribution, such as car-repair expenses.
There are some expenses you can't predict when it comes to your cars. But some you can anticipate: oil, tires, brakes, registration, inspections and regular maintenance. If you figure out the total estimated costs of these expenses for the year and divide that number by 12, you can get an idea of how much to budget each month.
You could use your refund to fund this category for the entire year; then you wouldn't have to set aside the money monthly in your budget. It could also help you avoid having to use your emergency fund if something were to go wrong with a vehicle, in this case. Try it with any similar expense category.
Only do these types of additional savings if you are out of debt and have a fully funded emergency fund.
5. Pay down the mortgage, go on vacation, give.
If your only debt is a home mortgage, you have an emergency fund, you've maxed out your investment contributions, and you don't have any specific big savings goals you are trying to meet, then do something rewarding. Take the family somewhere fun, pay extra on the mortgage or make a philanthropic contribution.
Obviously, be smart about what you do with any extra money you have. But if you're in this position, you probably have been pretty smart for a while now — I should probably be listening to your financial advice.
The key to being smart with your tax refund or any extra income you come across is to make sure you are being intentional about it; do things with a purpose. Don't just let cash come in one hand and flow out the other. Have a plan: Take care of the needs of your house and your family first. Use the budget to tell your money what it should do, and tell your refund what to do.
- What it takes to be middle class in each state
- How one woman unplugged from technology for...
- Renovation Solutions: 5 signs it is time to...
- Joseph Cramer, M.D.: A different view of the...
- It can cost you $12,000 a year to buy...
- Dave Ramsey says: Don't be ashamed of...
- Can a company really be altruistic?
- Why college matters more today than 20 years ago
- Dave Ramsey says: Don't be ashamed of... 17
- What could McDonald's do to fix its... 11
- Joseph Cramer, M.D.: A different view... 7
- How one woman unplugged from technology... 6
- It can cost you $12,000 a year to buy... 4
- US home sales bounced back in March,... 1
- Balancing act: Son's comment teaches a... 1
- Why college matters more today than 20... 1