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Everyday Cheapskate: Use Your Tax Refund to Make Your Life Better

Mary Hunt on

Discovering that you'll be getting a tax refund is certainly not the worst news you've had in your life. In fact, it's easy to see a tax refund as some kind of gift from the universe. You might even be feeling kinda proud of your forced savings account, to which you knowingly contribute every payday while living from paycheck to paycheck and relying on credit to make ends meet.

But here's the truth: A tax refund isn't a gift. It's part of every paycheck you should have been getting all along. It's not a saver's reward. You overpaid your taxes. Plan now for how you'll manage that check, or your tax refund could evaporate into thin air.

Get smart. Change your withholding (use an online calculator to determine the amount you should be having withheld, along with instructions on how to change it). Your goal is to neither owe nor be owed at the end of the year. A big tax refund is not a good thing! If you can come within $100 of that goal, you're golden.

But wait, you're not done. Lock eyeballs with the additional amount you see in your next paycheck -- the amount you will not be sending to the IRS to hold onto for you. Do what good money managers do: Create an automatic deposit authorization at your bank or credit union for that amount to be transferred into your savings account. Out of sight, out of mind. If you leave it in your checking account, I promise it will simply evaporate in your routine spending. Now is your opportunity to act responsibly.

As for this tax refund, you have options. The decision you make for what to do with that check could either make things worse or make your life so much better. Choose well.

NO. 1: CREATE AN EMERGENCY FUND

 

It's easy. Take the check to your bank, and use it to open a savings account. Then walk away and leave it alone, knowing that you have a fallback if something serious and unexpected happens that you absolutely cannot cover with your regular income. You might lose your job and need to keep food on the table and the bills paid for a few weeks while you make the transition. You may lose a friend or relative five states away and the trip is more than you can handle without going into debt.

NO. 2: PAY OFF A DEBT

If you have your emergency fund established, consider using that refund to pay off a debt like the balance on a credit card account or student loan bill. Just do it before you think of a dozen ways to fritter away that refund money.

NO. 3: OPEN AN IRA

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