The Best Moves for Your Tax Refund Cash

Although most people know it is unwise to pay in too much money in taxes every year, it's rather easy to do so. When tax overpayment happens, tax refunds are the result. This can often leave people wondering what to do with all that extra cash. Okay, maybe not wondering what to do (that new T.V. may be calling your name...), but it might leave you wondering what you should do with a hefty refund. Here are the basics about the wisest decisions for a windfall of cash.

Pay Down Debts

One of the best ways to deal with extra money is to pay down or pay off debts, beginning with the highest interest rates first. The key to this plan is to ensure that the extra money you may find yourself swimming in once a debt is paid off – you know, because you'll no longer have to send a monthly $100 to Chase – is applied to another debt or to savings in the future months.

Beef Up Your Emergency Savings

While paying off some debts may sound like the dreamiest proposition when presented with extra cash, it might not be the best move if your savings account is sitting at zero. Instead, if you have little or no savings, it may be best to put some or all of your tax refund toward beefing up the Benjamins. The kicker here is to make sure you have a savings cushion of three to six months (or more) living expenses in case an emergency, like a job loss, should occur.

Max Out Your Retirement Contributions

If you're lucky enough to live debt free and your emergency savings is sitting pretty, your next wisest thing is to max out your retirement contribution for the year. Check with your individual accounts for the details.

Invest

Those who have no unsecured debt, perfect emergency savings and maxed out retirement accounts could put the extra cash toward an investment. The options are endless, what with stocks, investment homes and business investments up for the grab, but choosing to place excess funds in an investment opportunity could be an excellent way to stash that unexpected cash. As with any investment, be sure to weigh your options first.

If Uncle Sam surprises you with extra money this year, you might want to assess your financial situation to make the wisest decision possible. Paying down debts, increasing savings, contributing to retirement and investing are all wonderful options to consider. However, as you move forward, you might want to change your withholding so that this year you receive the benefits of extra money every month rather than loaning it to the government – then you can earn interest and roll around in even more dough!

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Anonymous's picture

Michelle wrote:

Tue, 02/21/2012 - 13:12 Comment #: 1

We paid down debt and bought a cheap car!

Anonymous's picture

MoneyCone wrote:

Tue, 02/21/2012 - 15:20 Comment #: 2

You can also request your refund as an I-Bond. Something to keep in mind.

Christa Palm's picture

Christa Palm wrote:

Wed, 02/22/2012 - 18:38 Comment #: 3

Great job, Michelle!

Thanks for the tip, MoneyCone -- it sounds like a great option!

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