1. Pay Down Debt
It may not be the most exciting way to spend your refund, but you'll get more bang for your buck if you put that money toward reducing your debt load.
Where should you start? If you have high-interest debt, including credit card balances, tackle that first. Paying it off - or at least paying it down - is a smart investment. It's simple math: Putting that $2,000 IRS check in an account paying 1% interest while carrying a $2,000 credit card balance with 15% interest doesn't make much financial sense.
Once those monthly payments go away, you can put that money back in your pocket.
2. Feed Your Emergency Fund
Let's say you've paid off your high-interest debt, and you're thinking about what else you can do with that extra money. Then, your car breaks down. Or your refrigerator conks out. Or your basement floods. Or you get hit with an unexpected medical bill. Do you see where we're going with this? You can never go wrong with saving money for emergencies.
Unfortunately, many people don't have enough savings to deal with a sudden financial need. Using your tax refund to start or add to an emergency fund can help you be prepared for unanticipated expenses.
How much should you put away? Experts recommend setting aside at least three to six months' worth of living expenses in an interest-bearing savings account. But if you can't manage that, every little bit helps - even $500 can be handy in an emergency.
3. Build Your Savings
Okay, so you have an emergency fund, but that doesn't mean you should neglect other reasons for saving. For example, you can put your tax refund toward a vacation, a car purchase, or maybe a down payment on a house.
Think about other ways to save. The IRS lets you split you refund between up to three accounts when you use direct deposit, which means you can sock away some cash in a separate account where you won't be tempted to spend it.
Consider opening a money market account, which often pays higher interest than a saving account. Keep in mind that you may need a higher balance to open the account, avoid a monthly fee, or earn a higher rate. Whatever you save, the important thing is to get into the habit of putting money away and sticking with it.
4. Make Home Improvements
Putting money into savings is smart, but you can only use it t protect one of your most valuable assets - your home. Making improvements to your home can increase its value and make it a more enjoyable place to live.
Before you call the contractor, consider what renovations make the most sense. If your house needs repairs, taking care of them early - before they cause significant damage - can save you money in the long run.
If you're considering renovations, you'll want to invest in capital improvements like replacing windows, updating a kitchen or bath, building a deck, getting a new roof, or building an addition. These things increase the home's value, improve functionality, and make it more attractive to buyers if you put the house on the market. Keep track of what you spend. You'll need those numbers when you decide to sell.
5. Save More For Retirement
If your savings and home are in good shape, consider beefing up your retirement account. Investing your tax refund in your retirement fund can pay off, especially when you harness the power of compound interest. For example, you could take a $2,000 refund, invest it for 10 years with a 6% annual return rate, and you'll grow that initial sum into more than $3,500. If you keep investing $2,000 yearly during those 10 years, you could build an even bigger nest egg of $28,000. Do that for 20 years and you're looking at $78,000! That's nearly double the $40,000 in tax refunds you invested. The earlier you start saving for retirement, the more your money will grow, and the more financially secure you'll be.
6. Treat yourself
We saved the best for last. If your savings are solid, you have an emergency fund, you aren't facing significant home or car repairs, and you're already saving for retirement, maybe it's time to splurge. Treat yourself to that big extravagance you've been dreaming about (85-inch TV? Barista-quality espresso maker? Smart refrigerator? All-in-once washer and dryer combo?)
It doesn't have to be an all-or-nothing proposition. You can be reasonable and still have fun with your money. Experts recommend using 10% to 25% of your refund for something enjoyable, like taking a vacation or going on a shopping spree.
By making smart choices, you can ensure that your refund keeps working for you, putting you in a better position for the future.
