How to Spend Your Tax Refund Wisely

Here are some thoughts from Vanguard on how to spend your tax refund wisely. Their list:

1. Invest for retirement in an IRA.

2. Contribute more to your employer-sponsored retirement plan.

3. Invest for your child's education.

4. Set up an emergency fund.

5. Pay off your credit cards.

Ok, I agree with these -- they're all good ideas for what to do with a tax refund -- but I'd put them in a bit of a different order. Here's my list in order of priority:

1. Set up an emergency fund. At a minimum, you need 2-3 months of living expenses set aside as a base-level start to a good financial plan. Ideally, you'd have six months, but if you don't have 2-3 months, this would be the first place I'd suggest you save your money.

2. Contribute more to your employer-sponsored retirement plan. If you're not getting your employer's full match in your 401k, put your refund in here to be sure you get it. It's hard to beat a 50% or 100% return on your money (which is what you get when the money is matched.)

3. Pay off your credit cards. I could take either this one now or my next one now -- they are both good choices. But since you'll be saving anywhere up to 20% with this option versus (likely) earning less than that with the next option, I put paying off your credit cards next.

4. Invest for retirement in an IRA. In particular, a Roth IRA. And if you have enough to get your entire 401k match made, fully fund a Roth IRA and still have some savings left over, then finish out the 401k until it's maxed out. Then you can move on to the next option.

5. Invest for your child's education. Ideally, you have enough cushion to do all of these, but if not, I'm certainly in favor of funding retirement before college costs. That said, it's likely that you will eventually need to pay for part of your kids' college costs, so there's no better time to start saving than now.

That's my list -- what's yours?

Comments

[Amanda]

How about: Save for a house?

[LC]

Since most of the refund is from mortgage interest, we are putting it back to prepay our mortgage. Having said that, we are already contributing 30% of our income to retirement, have an emergency fund, and have no credit card debt. Those things would probably come first.

[Molly]

I have to say I agree. We use our refund as a savings account boost. It goes to our Roth and repairs/improvements on our home. But, we have already contributed to our 401k's to get our employers match and have a 3 month emergency fund.