I’ll assume that many of you will be receiving an income tax refund and/or a stimulus check. Here are some suggestions for what to do with those checks –
1. Emergency Fund – I like to maintain an emergency fund equal to $500 per person in our family. We have 4 people, right now, soon to be 5, so our emergency fund equals $2500. If you don’t have an emergency fund, use your check(s) to fund one.
2. Debt Reduction – If you have your emergency fund, but you still have non-mortgage debt, consider depositing your check and then sending a ‘big splash’ payment to one (or more) or your creditors. Depending on your debt reduction technique, you’ll send your extra payment to the account with the lowest balance or the account with the highest interest.
3. Roth IRA – Have you started saving for retirement? For 2008, the per person contribution limit for Roth IRAs (in most cases) is $5000.
4. Emergency Fund (2) – If you are out of debt, now would be a good time to really build up your emergency fund. I like to have enough money in my emergency fund to cover six months’ worth of expenses. Depositing that check could go a long ways towards funding your Emergency Fund.
5. Automobile Repairs/Maintenance – If you are trying to avoid borrowing money to purchase newer automobiles, you might consider using your refund or stimulus check to repair or maintain your automobile. I am going to use a portion of my stimulus check to buy new tires for my paid-for Honda.
6. Fun – If it’s been a while since you went out to eat or bought an new outfit, live a little. Personally, I wouldn’t spend every dollar of my check on ‘fun stuff’, but I’ll probably use a small portion of our stimulus check to buy some new golf balls and a new pair of running shoes.
7. College Savings – We have two kids, and a third on the way, and we are saving for their future college expenses. Take a look at ESAs and 529 plans and consider funding one or both.
Final notes – If you are getting back a sizable income tax refund, you might want to check your withholding. Remember, the money you are ‘receiving’ is actually your money! There is no real sense in loaning Uncle Sam your money, interest free, for a year. Also, please don’t use your refund / stimulus check as down payment for some item that you can’t afford. Don’t turn a blessing into a curse. Use the money wisely and you’ll be happy with your decision.