What Not to Do With Your Tax Refund

Everywhere around me people are rating their accountants.

"My accountant is awesome - I am going to get back $3,500."

"I'm thinking of switching accountants, he charges me $275 and I didn't get anything back this year."

"My accountant doesn't do anything - I'm going to do my own taxes."

Besides casting judgment on our accountants, this is also the time of year where people get some "extra" cash in the form of a tax refund. Even before we get the refund check, some of us are already putting it to use: repairs for the house, a nice dinner with family, a new watch, etc.

If you want to be financially free (besides , there is one thing you need to avoid doing with your refund check. Unfortunately most people fall in to the trap and that is ...

...spending it.

So if you are not supposed to spend your tax refund, what should you do with it?

The basic rule for most people is:

First, you Build your Emergency Fund (savings of at least 8 months of living expenses). Then with the money left over, you Pay Off Debt starting with the debt that has the highest interest. Anything left over, you Pay Yourself by putting it into a savings account that funnels that money into a sound investment such as a long-term mutual fund.

For those of you who are more advanced and serious about your finances, the question I must ask is why are you getting a tax refund? A tax refund is not "extra" money or a gift from the government. It is money that you have lent the government (interest free) by allowing them to withhold it from your taxes throughout the tax year. You are better off increasing your exemptions (usually on a W-4 form) and taking that extra cash per paycheck to build your emergency fund, pay off high interest debt or to invest.

If you want to be financially independent but don't have a solid plan, I recommend that you follow the "Be Financially Free Series" by clicking here and start with Lesson 1.