Your Tax Refund and Your Finances

This the the first time in a long time that we have received a tax refund. Normally we owe. But this year we saw the benefit of mortgage interest in terms of reducing how much we need to pay. We’re going to use it to help pay for what we need to put in a sprinkler system and a lawn. We were going to use it for dental stuff, but the cash discount the dentist offers made things affordable without the tax refund.

All of this thought about our tax refund got me thinking: What would I do with the money if I didn’t already have something to spend it on? I would probably use it to open another retirement account, since we only have the one right now. But before investing, it is a good idea to make sure that you have an emergency fund and that you have paid down debt. Rory Olsen, the CEO of wallstreetsurvivor.com offers this advice when it comes to using your tax refund to your best advantage:

Before you focus too much on investing or reducing debt, be sure to concentrate on building your cash security fund first, so that you can endure any rough events that occur in your life. In our current economic crisis, most financial planners are now recommending that individuals keep at least 6 months of their current income in cash (just a year ago the consensus was only 3 months of income in cash).  If your cash fund is adequate, then, pay off any credit card debt you may have accrued over the years. It’s important to realize that this debt usually carries an interest rate that is higher than what most investments have the potential of earning before taxes.

We don’t quite have six months of expenses, but we are fortunate enough to be in a relatively secure place right now. Both of us have fairly stable incomes that are unlikely to be dramatically diminished in the next few months. So we’re comfortable working to put in a lawn. (Besides, if don’t get a lawn in soon, the city will fine us.)

How will you be spending your tax refund?

Image source: doncav via Flickr