You’ve worked hard all year. You’ve paid the legally required percentage of your income to Uncle Sam. When tax time comes, you find that you’re getting a refund. That’s great! But what are you going to do with it?
Few people have trouble finding something to do with their tax refunds. But frequently, that “something” is spending it with reckless abandon. Sure, it feels good to buy some shiny new things. But there are more productive things we could do with that money.
Some refund recipients dedicate all or part of their tax refund to paying off debts. Depending on the amount of debt you’re in and the amount of your refund, this could save you lots of money in interest payments. For maximum impact, it’s best to use your refund to pay down the debt with the highest interest first. If you get that one paid in full and still have some money left over, move on to the one with the next highest interest rate.
Another smart thing to do with your tax refund is starting an emergency fund. Everyone needs a financial cushion in case of emergency or job loss. If you don’t already have one, a tax refund could give you a good start on it. But a tax refund is rarely enough to make up the three to six months’ worth of income that we should put away, so you’ll probably have to add a little more to it each time you get paid.
If you’re debt-free and already have an emergency fund, investing your tax refund may be a good strategy. You could put it in an existing retirement or college fund or use it to start a new one. You could purchase stocks and bonds with it. Or you could put it into an annuity. Investing your tax refund will allow your money to grow.
Another thing that some taxpayers do with their refunds is prepay their bills. This will give you peace of mind for months to come, because you won’t have to worry about being late with your payment, or even being unable to come up with the money to pay a bill. Most utility companies will allow you to do this.
Sometimes there is a legitimate reason for spending your tax refund on consumer goods. Perhaps your refrigerator is on the blink, or your car has seen its better days. Of course it’s always best to make repairs if possible, but in some cases we may not be able to justify the cost of repair because the item is very old or in poor condition. In these and similar situations, making that purchase (or putting a down payment on it) may be a wise way to use your refund.
When we receive our tax refunds, visions of things we want often start running through our minds. But going on a spending spree is not usually the wisest way to put that money to use. Instead of blowing it, why not use it to make your life less stressful?
