Putting Your Tax Refund to Work

There are tax advisors who will tell you that getting a fat refund check isn't a good thing, but it's too late to heed their advice now, so let the party begin!

You’ve filed your tax return and you’re now expecting Uncle Sam to reward you with a nice fat refund check. There are tax advisors who will tell you this isn’t a good thing; that you should tweak your withholding so you don’t get such a big refund. But for this tax year, what’s done is done.

So what do you do with that wad of cash?

Ask a financial planner and you’re likely to hear advice that you’ve heard before, but that doesn’t make it any less valid.

The top priority, according to the money experts, is to build up an emergency fund. Keeping three to six months of living expenses in a risk-free investment that you can tap into when you need it can give you a cushion against hard times along with a little much-needed peace of mind.

Ignore the fact that interest rates on safe investments like savings accounts and short-term CDs are minuscule; you’re not investing this stash to make money.

The next step, if you have any money left over, is to pay down high-interest credit-card debt. If your credit card is charging you 16% interest, for example, dollars you put toward paying off the balance are essentially providing you with a 16% return on your investment — tax-free. Where else can you get a yield like that?

After you’ve put those two tasks behind you, you might just have a little cash left, since the average tax refund this year is estimated to be $2,800. If you do, that’s the time to take a look at a mix of investments — bonds, stocks, mutual funds — that suit your investment goals and your time horizon.