We all wait for the moment when our beloved tax refund arrives (if we're lucky enough to get one!). We plan, and ponder, what we're going to spend it on! Itching for an early phone upgrade? What about a new laptop? Before you spend that money in your head, it's best to look at your finances and where the money would best be spent.
How to decide what to do with your tax return
What is the most pressing financial item in your life right now? Wherever it is, that should be your first priority. If there are leftover funds from your tax refund after you tend to your first priority, move on to the next highest important financial task. Priorities should be ordered according to which is most beneficial to you and your family. Large, outstanding debts should never be at the bottom of the list of priorities. Conversely, things like entertainment expenses should never be a top priority.
Use your tax refund to pay off debts
We highly recommend that you don't put personal debts owed to friends and family members ahead of credit card debts. A damaged relationship is nothing compared to years of being stuck in debt unable to get out from under your ever-accumulating interest payments. Unpaid credit card balances can hurt you financially by causing you to pay much more than you can afford purely in interest!
Depending on the interest rate on your credit card, you could be causing your family undue hardship with each month that your debts go unpaid. If you have more than one credit card to pay off, start by tackling the card with the highest interest rate. Even if you're only able to pay down a little of your debt with your tax refund, you're still contributing to your overall financial health because you're reducing the amount of interest you'll be charged over the years. Paying off $500 on a $1000 credit card debt means you're only going to be charged interest on the remaining $500 debt. Progress!
Use your tax refund to prevent spending in the future
Depending on the amount of money you get back, there are things around your home that you could use your money for to financially help yourself out in the future. If you're just expecting a few hundred dollars to come your way, those dollars may best be spent on something that will help prevent you from spending even MORE money in the future. Small home or auto repairs, for example, could help prevent larger problems from occurring later on. Hiring a plumber to fix the leaky pipe could cost you a few hundred dollars, but a flood caused by that same pipe bursting would cost you significantly more. Take inventory of what needs to be done to your home and see which issue is most pressing. Expecting a hefty amount of money that could take on a larger project? Take a step towards lowering your winter heating bill and install new insulated windows in your home. If there are no repairs to make, consider putting your money towards another important financial step – such as, building an emergency fund or saving for retirement.