6 Best Ways to Spend Your Tax Refund
Top Six Priorities for Your Tax Refund
1. Start or Increase Your Emergency Fund
Without an emergency fund, just one surprise major expense can send you on a debt spiral toward financial disaster. Many experts say that your fund should contain about six to eight months’ worth of savings in an easily accessible interest-bearing account (such as an online savings account or money market account). Storing that much money might take months (or even years) if you’re just taking a little bit out of each paycheck, so use your refund to make a significant deposit to your emergency fund.
2. Pay Off High-Interest Debt
After establishing an emergency fund, the next best thing you can do with your tax refund is reduce or eliminate any high-interest debt that you’re carrying. Put your refund to work by starting your debt elimination program of choice, paying off payday loans, title loans, debt consolidation loans, high-interest private student loans, car loans, or credit card debt.
3. Spend It On Something You Need
Are you having car trouble? Do you need a new laptop or mobile device? Have you put off important dental work? You need to take care of these essentials, and once you collect your refund, you may be able to cover the cost.
4. Start Itemized Savings Accounts
Now is the time to start practicing the mindset of the disciplined and frugal consumer. First, make a budget, and break your refund into pieces, each of which plants the seed in your bank account for important future purchases. Putting your refund toward specific savings goals can prevent you from taking on debt down the road when needs or desires arise. Capital One 360 offers some great features that allow you to set up these specific savings goals in your account.
5. Refinance Your Mortgage or Make Home Improvements
When you refinance your mortgage, you must still pay closing costs and fees. But use the refund to pay for the closing costs, and you can save thousands of dollars per year on mortgage interest.
6. Invest In a Tax-Sheltered Account
Depending on your income level, goals, age, and whether you have already fully funded your tax sheltered accounts, using your tax refund to get a head start on Roth IRA contributions or 529 college savings plan contributions can be a great move. This may result in your three-digit tax refund growing into to a four-digit addition over the course of several years.
Whether it’s a major windfall or just a drop in the bucket, your refund should feel like “found money” – and if you’re smart, you can put it to work for you and improve your financial situation. You can even treat yourself – just don’t blow it at on a huge, unnecessary splurge.