Single Parent Tax Refund

What Should Single Parents Do With Their Tax Refunds?

Your tax preparer gives you the good news. You are getting a nice sum of money back from the government for a tax refund. Before you go shopping, think about how you can best use this windfall.

If you have credit card debt, you are paying a high rate of interest, maybe even over 20%. You will never get ahead financially by this huge premium on your purchases. Credit card debt would be the best use of your tax refund and give you the highest “return” on your investment.

Do you have an emergency fund? Having at least one month's income in savings will make you rest easier at night. Then, an unforeseen expense doesn't end up having to go on your credit card where you have to pay the inflated interest charges. Make establishing an emergency fund your first priority after paying off the credit cards.

Maybe you have other, lower interest debt such as a car payment. By sending extra money in with your payment (be sure to designate that the extra money is principal so the loan company doesn't apply it against future interest), you could reduce the loan period so you can pay off the loan faster. This is assuming that your tax refund isn't for more than you owe on the debt.

While retirement and college savings are important, you may not want to put the money into these accounts when paying off other debt could save your more money in the long run. And, since single parents are often teetering on the edge of financial disaster, reducing monthly payments will cut down on your stress levels and once the you are out of debt, you can fund your retirement savings and later college if you have money left.

Your impulse may be to use your tax refund to finance a nice vacation, a flat screen TV or other luxury that you have been wanting and believe you deserve since your life is so hectic. Chances are, it is difficult to impossible for you to quickly come up with as large of a sum of money as what you got back on your taxes. If you have credit card debt or other consumer loans besides a mortgage, you will be helping your future finances by using the tax refund to pay off debt rather than blowing it on fun. You could always designate a small amount of the refund as fun so you get to enjoy a part of the windfall while spending the rest on debt repayment or savings.

By using your tax refund wisely, you can take a step toward your future financial independence. And, you may want to consider adjusting your withholding so that you get more money in your paychecks and less money in future tax returns.