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What to do with Your Tax Refund (and any Windfall)

April 27, 2013
Plain English Version

Thousands of Americans received or are getting a tax refund. Others may get a windfall from a lottery ticket or an inheritance. Whatever the source, experts agree on what you should do with the money. And no, they do not recommend buying lottery tickets.

Last year, the average tax refund came to $3,000. This year it may be slightly less. A financial specialist said, “Most people treat tax refunds as ‘found money’ and use it for wants, not needs.” Spend only half the refund and save the other half, she says.

Here are other good ideas.

Pay off your credit cards

Pay down high-interest debt. The interest rate charged on the average credit card is 12 percent. Remember, credit card interest is not tax deductible. You have to earn $16 to pay the $12 annual interest on a $100 loan. Getting rid of the interest is a great investment.

Take a course

The next best thing to do is to learn a new skill or improve one you already have. The more degrees, the more skills, the more money you may earn. A study showed that an associate degree returns $120 for every $100 you invest in getting it.

Pay down your mortgage

This is a better idea than refinancing, even though mortgage interest rates are low. The average homeowner is paying 4.5 percent mortgage interest. For people with lower credit scores or living in areas with low housing values refinancing may not worth it if the fees are too high.

Sure, spend some money on yourself, but remember to put some of the money to improving your financial life.

Source: The Wall Street Journal

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