April 15th is fast approaching us. That wonderful deadline where that mysterious Uncle Sam that I've still yet to meet comes either asking for money or sends me a check. It's time to look at the ways you can use any refund coming your way.
1. Pay down debt
This is step 1 for anyone that still carries debt, especially credit card debt. Paying off credit card debt is going to be the best guaranteed return that you'll find. According to CreditCards.com as of February 6th that national average interest rate on credit cards was 14.96%. If you carry $10,000 in credit card debt at the national average rate, it will take over 12 years to payoff if you make the minimum payment and you'll end up paying over $4,400 in interest over that time.
If you carry no credit card or high interest debt then it comes down to what you're comfortable with. If you have student loans or a mortgage then you need to check the interest rates. With mortgage rates being historically low for the last few years if you happened to refinance then skipping this step might be the way to go. If the interest rate is 5% or less then feel free to skip, between 5-8% then it's a toss up. Anything over 8% and I'd be paying down debt.
2. Build your emergency fund
Life happens. It's best to have a cushion to tide you over in case something major happens like a roof leak, car accident, job loss or any other possible problems that you couldn't have planned for. An emergency fund is about the only way that you can plan for the unexpected and I highly recommend having some savings set aside for this purpose so you don't have to go into debt to cover any expenses. The standard recommendation is for a 3-6 month emergency fund although this is highly dependent on what you are comfortable with.
3. Invest it
If you're already investing, then keep it up. Saving and investing is the only way to be able to reach financial independence. I prefer to invest in dividend growth stocks and will continue to do so because I feel they offer the best opportunity to reach early financial independence with a growing income stream.
4. Spend it
If you've taken care of all of the above and have already reached financial independence then by all means spend it on something that you enjoy.
We're expecting around a $2,000 refund but I haven't run all the numbers yet. When we get the final amount, around half will be spent on getting my wife's car tuned up and taking care of some routine maintenance on it and the other half will be put into savings towards early FI.
How will you be using your tax refund?