It's not often in life that we get lump sums of cash, and the temptation is great to do the wrong thing. According to the Internal Revenue Service, the average American's refund for tax year was about $3,000, a slight increase over the previous year. But whatever you're expecting, there are smart things you can do with it, as well as things that aren't so smart. Here's a quick checklist.
Spending it rather than investing it. Getting a lump sum of cash is a great time to consider investing, especially in a tax-advantaged vehicle like an IRA or other account that will allow your earnings to grow tax-deferred.
Not paying down debt. Every dollar you pay in interest makes your credit card company or other lender richer. Every dollar of debt you pay off makes you richer. If you're paying 15% interest on a credit card, paying it off is the same thing as earning 15%, tax-free and risk-free.
Not using it to generate a tax credit for next year. Can't stand the thought of not going shopping? Then buy something that will improve your home and generate a tax credit at the same time. Example? A solar water heater might set you back $3,000 to $5,000. But it will save you about 20% on your electric bill every month for years to come, and get you a tax credit next year equaling 30% of the cost. If you spend $4,000 on a solar water heater, next year's tax bill will be $1,200 lower.
Failing to create a memory. Take $3,000, deposit it in your checking account, and then gradually use it in dribs and drabs. When it's over, what do you have? Nothing. If you're determined to blow your tax refund, at least buy a memory with it. Go whitewater rafting on the Snake River. Go on a cruise. Do anything except letting your windfall slowly blow away.
Not doing something to improve yourself. Maybe it's time to take that class that will prepare you for a better job, or get that computer or software that might help you make some money on the side. Even a new suit that might get you noticed at work. There's something you can do that will pay dividends.
Using it to create more debt. Using your tax refund as a down payment on a car or other type of loan -- especially the kind used to purchase a depreciating asset -- should top the list of dumb things to do, especially if it's unnecessary.
Using it to sustain an unsustainable lifestyle. If you're one of the millions of Americans who pays a fee to get a refund anticipation loan because you need the money instantly, that's a sign you're in over your head. Do some reading on refund loans and resolve to never again pay a tax preparer to get your refund. Then do what you can to reverse the dire financial situation that's making an instant refund necessary. (Adopted From http://money.msn.com/saving-money-tips/)
