Tax Refund: Spend on iPad or IRA?

The April 2010 issue of Campus Talk Magazine contains two pie charts illustrating the difference between how Americans SAY they will use their tax refunds and how they actually use it. In the graphic, 57 percent say they will invest or save their money, 21 percent will use it to pay down debt, 12 percent will use it on home or car repairs and 10 percent will give it to charity.

The chart illustrating how Americans ACTUALLY use their tax refund reveals that 34 percent will use it to purchase the latest iPhone and iPhone accessories, 20 percent will use it on pay-per-view UFC championship fights and the remaining half of Americans will use it on various activities such as a keg party, NASA space camp, a NASCAR dream weekend, rent-a-celebrity for a day, revenge on an ex and a Kobe steak.

Obviously, this is a humorous comparison, but it begs the question: How should you use your tax refund?

A questionnaire directed to a group of personal finance professionals revealed a lot of different ways to wisely use your tax refund; however each professional agreed that your first step (after learning what your refund will be and mailing in the paperwork) is to adjust your W-4 to decrease the amount of taxes paid to the government throughout the year. Essentially, if you receive a tax refund, you gave the government an interest-free loan. Since the government would never grant you that favor, it doesn't make sense to do it for them.

"If you've had NSF or overdraft charges in the past year, put the money in the bank and don't touch it," advises Ethan Ewing of Bills.com. This seems like common sense, but you'd be surprised by how many people spend their tax refund within a month and receive an NSF or overdraft fee two months later. After adjusting your W-4, you should pay down any consumer debt--especially high-interest debt. Next, you should put some money aside to create a short-term emergency savings account. Some finance professionals measure wealth in months. Meaning, if you were to stop working today, the number of months that you could continue paying bills without needing another paycheck is how wealthy you are. If you are not at least six months wealthy, you need to start saving now.

In addition, you should schedule a financial checkup for yourself by hiring a financial planner, obtaining insurance and seeing a dentist or doctor. Another wise choice for spending your tax refund is to start a business. Starting a business is as simple as choosing a name, filing with the appropriate state entity and marketing your services or product. As well as producing extra monthly income, deducting small business expenses will help reduce the taxes you pay to the government each year.

Denise Winston, a 25 year banker turned financial educator, suggests that if the aforementioned areas are covered you should "start an IRA or Roth IRA account." And if a parent, you should "take your kids to the bank and meet with an investment adviser." Educating--rather than just talking to-- your kids about money will help them build the habits needed to never have to lean on you for money after moving out. A good way to accomplish this and entertain them as well is through the use of SmartyPig.com. SmartyPig is a free service that allows you to save money for specific goals and share the status of your goal through various social networks. Your friends and family can contribute to your fund as well and monitor its progress. To make the service even more exciting, a SmartyPig account pays 2% interest to the holder--higher than most traditional savings accounts.

Tax Day is the perfect time for you to take charge of your financial future. Being more responsible with your tax refund this year could be the first step you take from being a baller on a budget to being a plain baller.

Ballers On Budgets was founded in 2009 as a project dedicated to educating people on how to live within their financial means while increasing their social status within their community with the aim to provide resources, information, and alternatives to spending a lot of money while engaging in a socially active lifestyle.