Some people will spend their federal or state tax refund on a new iPad. Others will dump the extra cash into a vacation.
Both bad ideas.
First, a refund simply means that you gave the government a interest-free loan for 12 months. Another bad move.
But, let’s not judge. Sometimes, a tax refund can’t be avoided and might be a welcome windfall.
The U.S. Internal Revenue Service estimates that the average refund for the current tax season will be a roughly $2,800.
What are you going to do with that money?
If it’s not already earmarked for responsible uses such as a child’s education or investments, my advice would be to either pay down a credit card or save the money.
In recent years, many credit card companies boosted their interest rates. Get out from paying 18 percent on a DVD player you bought in 2010. Pay off that card and stop paying high fees.
“Using your refund to pay off a balance with an 18 percent interest rate is like earning 18 percent on your investments — an incredibly valuable use of the money,” according to recent Kiplinger article.
The other option is to save the money. But, make sure the cash is liquid, or easy to grab. Some savings and money market accounts carry steep restrictions on how and when you can withdraw your cash.
The money is yours. If keeping it buried in the backyard makes you feel more comfortable, then that’s what you should do. Just make sure you have access to the money when it’s most needed.