Your taxes are filed and the check is in the mail. Now comes the big question: How will you spend your refund — save it or splurge?
The Internal Revenue Service expects to issue $300 billion in tax refunds this year, the Associated Press reports , with the average check totaling $3,000. This influx of ready cash would be a huge lift for the nation’s economy if every check were spent this spring, but most financial experts agree that blowing an annual windfall in a shopping orgy is not a wise strategy.
A recent poll suggests that many Americans are listening to this advice. Forty-nine percent of people who intentionally withhold extra from their paychecks to get a refund say they plan to use the money to pay down debt. Forty-four percent plan to save the money.
If you're expecting a refund this year, the nonprofit National Endowment for Financial Education, which sponsored the poll, suggests you spend your refund wisely. Here are some smart uses:
- Pay down debt: Credit card bills piling up? Tackle this first. Start with the card that has the highest interest rate, and if there is money left over, move to the next card.
- Start an emergency fund: If you don’t have at least $500 squirreled away for emergencies, setting up a rainy-day savings account should be your next priority. A stash that can cover three to six months’ of living expenses should be your ultimate goal.
- Save for retirement: Put your refund into an IRA where it will grow tax-free. The contribution may be deductible
- Pay for maintenance: Don’t let small home or car problems turn into huge headaches. If you’ve been delaying needed repairs, let your refund come to the rescue.
- Prepay bills: If you decide to pay down a loan, make sure there are no prepayment penalties.
- Go ahead and splurge: Buy that television or book that trip to Hawaii. Just make sure the first five suggestions on this list are covered.
One final tip if you haven’t filed yet: Take a deep breath and relax. You have all weekend to work on your returns. Tax day is Monday, April 18, this year.
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