Tax refund dilemma: Save, spend or reduce debtPosted: Updated:
If you are like many Americans, you are probably anxiously awaiting your tax refund from the government. While your annual tax refund may look and feel like free money, it's not. You worked hard to earn every penny of your income-including your tax refund.
This year's tax refund dilemma may be weighing heavily on the minds of many taxpayers. Several hundred or thousands of dollars could make a big difference for many families who are struggling to make ends meet. At this point, it's pretty obvious that the economic downturn is not going to be a temporary struggle. It's important to carefully consider all financial decisions, including how to make the most of your refund. Before making any hasty decisions concerning your tax reimbursement, consider the following suggestions offered by Money Management International.
Save - Analysts believe hard times will persist in 2009. In fact, the current financial pressures are said to get worse before they get better. Placing your windfall money in a savings account could be the difference between a financial setback and a financial disaster. Besides, you work hard for your money, so make your money work hard for you. Depositing $2,000 into a savings vehicle that earns 8 percent interest can really add up. After 5 years, it will be worth $2,939. After 10 years, it will be worth $4,318.
Spend - After months of living frugally, it might be tempting to splurge and may even feel a bit more acceptable. If you choose to spend your refund, spend smart now for big savings later. Upgrade your appliances to energy-efficient models that can lower your electric, gas, and water bills and save money in the long run. Complete car maintenance and home repairs to help add value and preserve the life of your investments.
Reduce debt - Reducing your debt allows you the freedom to make smart future financial choices. For consumers struggling with credit card debt, using a refund to accelerate debt payments is an easy financial decision. If you pay the minimum monthly payment of 4 percent on a $6,000 credit card debt with an 18 percent interest rate, it would take more than 13 years to repay. In that time, you would pay more than $3,500 in interest charges.
Finally, if you're tired of facing the "tax refund dilemma," consider reducing the withholding on your W-4 and see more money on your paycheck. Calculators at can help you figure your appropriate amount. Just think, if your refund this year was $2,000, you could have increased your take-home pay by $167 a month.