It’s the most wonderful time of the year for some — the season in which your state and federal government pays its debt to you in the form of a big, fat tax refund. If you’re expecting Uncle Sam to be generous this year, it’s tempting to spend the money on luxury items or vacations as soon as it hits your bank account. But it’s not wise to splurge on a vacation or new TV when you’re still paying off high-interest credit card debt from the last vacation or big purchase.
When you receive your income tax refund, it’s okay to allow yourself a little treat. Don’t blow all of it on new shoes and nice dinners. The best thing to do with your tax refund is to have fun with 10% of the money, then use the rest to improve your financial situation.
Here are 10 smart ways to use your income-tax refund wisely:
1. Pay off credit card debt with your tax refund.
If you’ve been battling the same credit card balance for some time now, the smartest thing to do with your tax refund is to use it to pay down your credit card and work toward getting out of debt. Putting a lump sum of cash toward your balance will save you hundreds of dollars in interest, and get some of your monthly bill burden off your back. Use your extra cash flow moving forward for better purposes, like saving for your next vacation.
2. Lighten your bill load.
If you don’t have any credit card debt (hooray!), you could tackle another bill that tends to sneak up at inopportune times, like your car insurance, for instance. Or, you could speed up the repayment of a student loan or an auto loan by plunking down a lump sum. If you budget, you can allocate the money for expensive times of year when you tend to run short, such as around holidays or paying for summer camp.
3. Invest your refund money in your IRA.
Ideally, you’re saving for retirement with automatic deposits into a 401(k) or IRA account. But if you’re like most people, you rarely have the extra money to contribute the maximum amount allowed. If you have a significant number of years before you retire and some investing luck, a couple of thousand dollars put away today has the potential to grow exponentially.
4. Seed an emergency fund.
Experts recommend having three to six months of living expenses in a savings account in case you lose your job or something major happens. Of course, that’s not feasible for everyone, but every little bit helps. A smart way to use your tax refund is to sock it away for a rainy day. Once your emergency fund is started, you can continue to add a few dollars a week to it. This cushion can help cover things like home-appliance breakdowns or a temporary loss of income, so your unexpected expenses don’t wind up on your charge cards.
5. Invest in yourself.
This could mean taking a class in investing, registering for a conference or hiring a piano teacher. You’re not frittering away your tax refund, but putting the money toward your long-term personal goals. A new skill, such as painting or music, can bring you happiness for years. It can save you money (if you learn to knit or build wooden furniture) and even earn you money if you take a career development class that will let you move to a more senior or higher-paying job.
6. Take care of a health issue you’ve been putting off because of the cost.
Put your tax refund toward your health. Whether it’s getting new glasses or taking care of a pricey dental problem, being able to do those things before they reach “I have no choice” emergency status is a blessing. Plus, you might save money by spending now before the problem gets larger.
7. Improve your home.
Consider putting your refund to good use by attending to important home improvements. Updates such as adding insulation and replacing old windows and doors save energy and therefore money. You might make the money you spend back in savings! Or perhaps it’s time to remodel your bathroom or kitchen. You’re adding value to your home at the same time you’re improving your living experience.
8. Apply your refund toward next year’s taxes.
This tax refund advice is commonly spread among self-employed taxpayers, who are required to pay quarterly taxes since they don’t have taxes withheld. By applying any overpayment toward upcoming tax payments, you can free up other cash.
9. Splurge on something you’ve always wanted to do.
If you’re out of debt and have substantial savings, consider using your tax refund to help fund the trip to Antarctica or Australia that you’ve always dreamed of taking. Such an experience can be life-changing, and you never know what impact it will have on your future until you actually do it. Plus, the memories will last a lifetime. (Read more tips about saving money for travel.)
10. Save some money for fun.
No matter what you decide to do with the bulk of your tax refund, go ahead and set aside a small percentage of it to enjoy guilt-free. Everyone deserves a splurge now and then, whether it’s dinner out at a nice restaurant, a massage or even a weekend getaway if you can swing it. Take our advice on saving money at restaurants and on entertainment, and you can get more fun out of the money you set aside to simply enjoy.
Most economists would say that you should not be getting a large refund in the first place. If you do, you should adjust your withholding to reduce the amount of tax taken from each paycheck. Otherwise, you are giving the government an interest-free loan.
How have you spend tax refunds in the past? What are you planning to do this year?
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