As 2012 draws to a close many of us are looking forward to getting a tax refund for the year. Many have already decided how to spend it, some have already spent it five or six ways in their mind. As you look forward to 2013, now is a good time to think hard and realistically about that refund. Here are some things to bear in mind.
1. If your refund is over $2,000, you are having too much withheld. A refund is exactly what it says, a giving back to you some of your own money. By getting a large refund you have made the IRS an interest free loan during 2012. Look at it this way: a $6,000 refund means you had $500 per month too much withheld from your pay. What would that extra $500 a month have done for you? Now is a good time to use one of the calculators you can find on the IRS website (www.irs.gov) to see how much you should have withheld.
2. Pay down high interest debt, especially any payday loans you might have. High interest debt hurts in several ways. First there is the actual monetary cost of the debt. Then there is the emotional cost of worrying about making payments. Finally there is potential risk to your credit score or even the chance of defaulting.
3. Build up your emergency fund. Ideally you should have enough money set aside for three to six months' worth of normal living expenses (including your house payment).
4. Beef up your IRA or 401(k). Check with your plan administrator about the maximum contributions and if you haven't reached those, consider using some of your refund to add to your retirement account.
5. Save for something you have wanted. Maybe it's a new house or a new car or some renovations to your home such as new carpet. Your refund can jump start your ability to reach that goal.
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