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Getting a check in the mail from Uncle Sam is every cash-strapped college student’s dream. But experts warn against rushing out and spending frivolously.
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A tax refund check can seem like “found” money, but students need to look at it as money they’ve already earned, says Suzanna de Baca, vice president of Wealth Strategies at Ameriprise Financial.
“A tax return should be treated like any income a student makes and can be considered in an overall budget to use towards financial goals.”
To avoid spender’s remorse, here are five recommendations on how college students can use their refund wisely.
Pay off debt. Paying off debt should be a student’s top priority if they have a little extra cash, and they should start with high interest rate balances.
“Using a tax refund to pay down debt can be a good way to get the most for your money,” says Gerri Detweiler, personal finance expert for Credit.com. “Just don't let the fact that your balance is paid down give you an excuse to run up new debt.”
Create or add to a savings account. “The financial realities that students will face after graduation are difficult, but having some cash in the bank can make things a bit easier when it comes time to find a job and begin paying back those student loans,” de Baca says.
Getting into the habit of saving in college will create good habits that will extend into adulthood. “It could help you avoid credit card debt in those months after college graduation when it’s hard to even afford outfits for work or rent,” says Kimberly Palmer author of Generation Earn.
Create an emergency fund. Students never know when an unexpected cost will pop up and carry a hefty price tag, so they should always have a set amount of funds set aside to cover any emergencies.
“If your car breaks down, for example, or a roommate skips out without paying her share of the utilities, your emergency savings account can mean the difference between making it to class or not, or keeping the utilities on.”
Invest in post-graduate necessities. Students on the cusp of graduation can get a head start on their new lifestyle and career expenses with a substantial tax return.
“Professional work attire, for example, is somewhat pricey but also essential for new grads in new jobs – investing in something like that can help you earn more later,” says Palmer.
Have a little fun. Students with no expensive debt, at least three months of emergency savings, and a savings account should feel free to splurge using some of their refund.
“Research shows we get the most lasting joy out of experiences, so consider a vacation, dinners with friends, or a fun day trip,” recommends Palmer.
While saving or spending money carefully is a great way to start developing good financial habits, Detweiler stresses students try to be conscious about what they choose to do with their hard-earned tax refund.
“If you blow it, there's a great chance you won't even remember next year what you spent it on.”