Do you consider it “free” money or hard-earned cash? How you think about your tax refund might determine what you do with it.
Whether you want to build up a family emergency fund or pay down some debt, a tax refund can be a welcome proposition. And, now is a great time to start planning on what to do with your tax refund to make sure it goes towards something worthwhile.
Here are a few smart ways to spend your tax refund as well as some things you might want to avoid.
What Should You Do with Your Tax Refund?
If you get a refund, here are some ways to get the most out of your money:
- Get Out of Debt
Paying down any high-interest debt, like credit cards, will serve you well in the long run and could save you money. If you have a rewards card, you’ll get the added bonus of earning miles or getting cash back on the amount you’ve paid off. Plus, seeing that lower balance on your credit card might bring you a sense of relief.
- Go Big (or Small) On a Purchase
Your 22-year-old self might have spent your whole tax refund on a 50-inch flat screen TV. But a more practical choice would be buying a new dishwasher or a piece of furniture you need to replace in your house.
- Make Updates to Your Home
Have you been eyeing a new patio or a remodeled kitchen? Using your tax refund on home improvement can be a solid investment. You’ll get some good use out of your upgrade, and it could help your house’s resale value if you decide to move.
- Saving for Kids
Adding money to your kid’s college fund is a great way to build it up faster and put your tax refund towards something fulfilling. With rising college tuition, that extra money could be a big help once your children graduate.
- Create an Emergency Fund
It seems like life is constantly throwing us curveballs, whether it’s unexpected car maintenance or job loss. Creating or adding to an emergency fund is another smart way to stow away extra cash. And while you hope you never have to use it, you’ll probably feel better for having it.
- Take a Vacation
Book a trip for the family with your travel or cash rewards card and use your tax refund to pay it off. You’ll earn airline miles or cash back. It’s a win-win.
- Invest in Yourself
Take some of that extra cash and learn something new. You can take your hobby to the next level or study a new skill by putting your tax refund towards buying new materials or taking a class online or at a local college.
- Contribute to Retirement
Whether it’s an individual retirement account or your company’s 401(k) plan, you can always add a little more to boost your savings down the road no matter how close you are to retiring.
What Not to Do with Your Tax Refund
If you want to make the most out of your refund, try to avoid the following:
- Lose It to Depreciation
When you spend a nice chunk of change on something, you don’t want it to lose value overnight. It might be best to steer away from things that depreciate quickly, like cars or boats.
- Gamble It Away
Hitting the casino might seem like a good way to spend money you didn’t expect to have, but it might not be the most practical thing to do with your refund since the return is far from guaranteed.
- Make Unnecessary Purchases
Do you ever look at your checking account and ask, “Where did all my money go?” You might ask yourself the same thing about your tax refund if you treat it like extra spending money and use it on a bunch of small or unnecessary purchases.
- Spend It Before You Get It
Spending money you have is probably a good rule of thumb compared to spending money you don’t have. Even if you know how much you’re getting back, there’s no guarantee on when you’re getting your refund. You can avoid owing money you don’t have if you wait for your refund to be deposited.
Ultimately, how you spend your tax refund is up to you, but there are a lot of smart ways you can get the most out of it. Spending it wisely can help you make a needed improvement in your life or help your family in a positive way.