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Tax refunds are nice but aren’t fast cash

March 8, 2010 by Ailse Andrews  
Filed under Personal Finance

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Repayment of a government loan

Consumers looking for fast cash should use their tax refund wisely. When people get a tax refund, they are getting a refund from the government on the principal of a year long loan. Interest isn’t part of payment and many people pay too much over the year. This is best handled by adjusting withholding upon situation changes, i.e. the purchase of a home, or sale, or a marriage, etc. Taxpayers who end up getting a good tax return should be wise with the extra money and carefully put the funds to good use.

Using a refund to pay down debt

By far the most important thing to do with a tax refund is to pay down debt. Since the recession led many to debt, more people than ever before were saddled with high interest rates. The debt needs to be paid off if anyone wants to get out from under debts. Using a tax refund to pay debts is a great idea. That doesn’t mean only credit card debt, but also mortgage, car loans or student loans. For example, paying one double mortgage payment a year can shave the loan’s lifespan by two years.

Starting an emergency fund

Tax refund money can also be used to build up an emergency fund. One thing consumers learned throughout the recession was that cash reserves are the only sure-fire thing to count on. Creditors closed shop when the economy began to tank and it got too difficult to manage. People that had one emergency credit card squirreled away were surprised with lenders closed the cards or slashed their limits.

The lesson to be learned was that liquid assets are crucial for every consumer to have. When it comes to a tax return, the money can be used to start a good financial reserve. This can serve as a critical buffer for emergencies or disasters that require cash. It is suggested that people should have three to six months of expenses in savings as emergency money at all times.

Putting a tax refund towards a retirement savings

Fast cash from a tax refund can also be channeled towards retirement savings. Saving for retirement needs to be a priority for everyone. As Social Security winds down to oblivion, more people are going to have to take their retirement plan in their own hands. Experts caution that other priorities should not take precedence. Mark Zandi of Economy.com said, “Too many young parents prioritize their children’s education fund before their own retirement. The bottom line is – education can be funded through loans, grants, scholarships and part-time work. Retirement can’t.”

Fund an education account

On the other hand, if a consumer has their own retirement fund on track, using a tax refund for education may be a wise idea. It’s never too early to start saving for college and the cost is going to rise steadily over the next few decades. There are many savings plans available, including an ESA plan and 529 plans. The sacrifice of money into the account right away is an option, and it will save money over time and a good education is invaluable.

Tax refund funding

Gone are the days when consumers viewed a tax refund as fast cash to spend frivolously. In today’s market, it’s crucial to manage money wisely. It’s especially crucial to manage money that comes to consumers in hefty amounts. As Zandi added, “Substantial amounts of money don’t come to consumers that often, so a tax refund is something everyone should be ready to take advantage of, and use in the most beneficial way possible.”


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