First of all, set aside a portion of the refund check, perhaps 20 percent, for your own immediate personal pleasure. Spend some time planning how you will spend this small windfall, and really enjoy the process. Buy an experience that you will always remember or something beautiful or useful for yourself.
Then, get down to business.
If you have credit card debt, this tax refund can be just the thing you need to jump start a debt reduction plan. Use your refund check to pay down the credit card with the highest interest rate. At the same time, sit down and create a plan to reduce your debt. This is a wonderful time to discuss debt and savings with your entire family, and teach your children the value of planning for the future and financial independence. (If you’re in debt and looking to get out, check out our 21-Day Debt Makeover).
If you are not in debt, you can use this money to set up a cash emergency fund, a special fund of cash set aside for genuine emergencies. This is not the money to tap when you need a new couch or you’re dying for a weekend away. This is money for a time when you need to pay for something you or your family really needs. The security provided by this treasure-trove of money is invaluable.
If you already have money set aside, use the refund to increase your retirement plan contribution at work. Depending on your salary and your company’s policies, you can increase your contribution by the entire refund for one paycheck and then decrease it for the next, or slowly set aside an amount equivalent to the tax refund you received.