Getting money back from Uncle Sam can be a nice windfall of unexpected money, but don’t let it burn a hole in your pocket.
“When people get that refund they want to spend it because they feel like it’s free money even though it’s their money,” says Jeff Bucher, president of Citizen Advisory Group. “At the end of the day, it might make the most sense to apply it toward any high interest rate debt they’ve accumulated.”
Taxpayers need to keep in mind that a tax refund is essentially the government returning money they overpaid at some point over the last year. Experts recommend evaluating your financial situation to best determine how to use the refund: pay down debt, increase savings, spend it or use it to invest.
If you have credit card debt or other high interest rate debt, financial experts recommend using the money to pay it down.
If you don’t have any debt, review (or create) your rainy day fund to make sure it has enough to cover three to six months of expenses, suggests John McDonough, managing member of the general partner of Studemont Group.
If you have no debt and enough savings tucked away, financial advisors recommend spending a portion of the refund and investing the rest.continue reading »