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Get the Most Out of Your Tax Refund

Financially speaking, it's actually better to break even on your income taxes than it is to get a refund. When you get a refund, it means you've basically loaned that amount of money to the government interest-free. I think everyone would agree that it's better to get a refund than to have to pay at tax time, though!

If you are receiving a tax refund, think about what you'll do with the money before you get it. If you already have it in your possession – don't use it until you've considered your options! Sure, you could take a vacation, buy yourself a big screen television or deposit it into your every day checking account and use a little here and there until it's gone. You'll probably have a good time doing it, but if you want to get more than instant gratification out of your refund – you need a better plan.

How many times have you said: “I'll start my emergency fund as soon as I have extra money”, or “I would start saving for retirement, but I live paycheck to paycheck and need every last dime to survive.” Well, guess what? A tax refund is money that you receive above and beyond your regular pay, and you could use it to start your emergency fund or begin saving for retirement.

If setting up an emergency fund or short-term savings, your best option is probably an interest-earning savings account. Look for accounts that don't charge annual or monthly fees. You want your money to make you money – not cost you money! Because an emergency fund needs to be accessible at a moments notice at times, it's a good idea to use a savings account that lets you access the money through a debit card or by transferring the money into another account when you need it.

If you already have an emergency fund, a tax refund is a good opportunity to start saving for retirement (or boost whatever savings you already have). People are complaining that their investments are all losing money due to the declining economy, so at this time it may make more sense to use an FDIC insured savings option, with fixed interest rates. You can set up long term savings that won't decline in value through fixed rate IRAs, Certificate of Deposits, or even fixed rate money market accounts.

Look at the different interest rates offered for each savings option, find the account that charges the least amount (or no) fees, and deposit the money. Compare the advantages and disadvantages of each account based on how long you plan to save the money and what requirements you must meet to withdraw the money without penalty.

  |     |   Comment #1
As soon as we found out the specific amount of our refund, we made a list of what we would do with it, in priority order. Most of it went to savings. If you don't have a plan, you will blindly spend it before you realize it. www.gettingaheadblog.com
  |     |   Comment #2
I have been looking for a long time and found this post.

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