A tax refund is the return of a small portion of hard-earned money of the taxpayer. It should not be treated as a gift from the government or as a yearly bonus. When taxpayers end up paying more than their fair share of tax throughout the year, the extra amount is refunded to them. Thus, the taxpayers virtually get back the principal amount of a loan taken by the government, excluding the interest. To minimize this charity the withholding of the taxpayer needs to be adjusted. If that is not enough or feasible, it is sensible to use the corpus of refund wisely.

Ideas and Suggestions to Optimize the Use of Tax Refund in the Era of Economic Downturn

Elimination of Debt: A list of all debts from the lowest amount to the highest is prepared. It is better to start with the lowest amount and eliminate as many debts as possible. If the debts are of different rates of interest, then it is better to repay the loan with the highest rate of interest. For example, paying back a loan with a 25% rate of interest saves 10% interest more than a loan with a 15% rate of interest.

Emergency Fund: The economic downturn has proved that everyone should have an emergency fund. Lack of liquidity is the problem in case of an emergency. A loss of job, accident, or home repair can be battled out if there is a financial buffer. There should be expenses of at least two months stacked away in a different account from where regular expenses are made. The startup can be with $1,000 with regular small monthly contributions that follow.

Investment Options: When the debts are taken care of and provisions for emergency fund are made, investing is the option that follows.

• Investing in Stocks or Mutual Fund: In the long run, equity is the best tool to overcome inflation and get the best return on investment. Therefore, investing in equity is a wise option for investors. But as one becomes older, it is better to shift to debt options gradually.

• Investing in Real Estate: Price of a land rarely depreciates. So, it is great to take advantage of an already depressed housing market and start planning for a home if you already don’t have one.

• Invest in Education: As the cost of education is growing alarmingly, it is better to start saving for higher education of children at an early age. Time and compound interest will take care of the rest. Not only for children, if an extra diploma or training can help you to climb more steps in your career, don’t hesitate to go for it. This will help you to earn extra money as well.

Using tax calculation software will help you to get tax refund early and use it early so that the taxpayer should catch on if the filing was missed. Tax refund should not be splurged. But after all the hard work, debt payment, saving for retirement and education, a small treat is well deserved.