There isn’t much that will brighten your day more than when you see a large check come in the mail or hit your bank account. The tax refund has finally come! What are we going to do with it? Should we be responsible or should we hop on the next flight to Vegas?
Ever since I started claiming myself on my tax return, the tax refund has been something to look forward to. I believe that most people feel that way, even though receiving a large tax return isn’t that great when you think about it. A large return means that we have overpaid and have given an interest free loan to the government.
When I was younger, buying the latest technology or spending it on who knows what, was exactly what I would do with my refund. Once I got married, that all changed. Now we place the money into a savings account to pay for having a baby, or putting a down payment on a car, not to mention the home improvements or repairs that need to be made.
While it is really easy to want to splurge a bit with our refund, carefully managing our refund is a fiscally responsible move. So what should you use your refund for? Here are 7 smart ideas that you can do with your refund:
- Create an Emergency Fund
When it comes down to it, I believe the emergency fund is the best place to start applying your tax refund. I have mentioned before that just one surprise expense can send you into a downward spiral toward disaster financially. If you haven’t started an emergency fund, or haven’t fully vested your emergency fund now is the right time to get it moving. Experts say having 3 to 6 months’ worth of living expenses is what we should be shooting for. So whether you are just getting started, or you are going to increase what you have, an emergency fund will leave you breathing a little easier when the next crisis comes knocking. Get started by saving $1,000 and begin increasing the amount until you have reached the recommended amount. If you don’t have an emergency fund, check out my Beginner’s Guide to Getting Your Emergency Fund Set Up.
- Pay Off Debt
Besides creating an emergency fund, I believe that paying down credit card debt is one of the smartest moves you can make. It doesn’t make much sense to simply drop your $3,000+ tax refund into your savings account at the bank with a 1% or less rate of return. The average household credit card debt is $9,600. The average interest rate on credit cards are above 15% and most credit cards will even have higher rates than 15%. Of course, paying off any debt is a good place to put your tax refund.With the average household having a balance of $9,600 in credit card debt, your monthly payments are probably around $300-$400 a month. By going this route, you will quickly be able to put more money in the bank.
- Fund Your Retirement (Tax Sheltered Account)
Depending on your goals, age, income level and whether or not you have fully funded your retirement (which is unlikely), using your tax refund to get a head start contributing to a Roth IRA or 529 College Savings Plan can be a great move. By starting now, you will be grateful that you began to save for retirement rather than spend it on something you most likely don’t even have any longer. Funding a Traditional IRA may also reduce your taxes.If you want to find out if you are eligible to contribute to an IRA, check out this great calculator that will tell you how much you are able to contribute each year.
- Start a Business
Getting a business up and running can take a lot of money. If you have been looking for a little green to get moving on your business or taking your business to the next level, using some or all of your tax refund may get you there. You may find that it will have a great return on your investment, and give you a few tax deductions along the way.
- Put it into a Savings Account
One thing I learned this year, is that the IRS lets you break up your payment into two or three different accounts. This can allow you to stash away some of the cash to keep it out of sight out of mind.Take a look at your budget and see if one of your sinking funds or part of your categorized savings accounts could be supplemented. We are expanding our family this year and will be outgrowing our family car. One of the ways we will be using our tax refund is a down payment on a (new to us) family van.
- Refinance Your Mortgage or Prepay Your Mortgage Payments
Refinancing your mortgage can be a great option for using your tax refund. When you refinance your home, you may have to pay closing costs and fees, which is where your refund enters the picture. By refinancing your how, you can save thousands each year on your mortgage interest.You could also make extra payments on your mortgage to save money over the long term. The beginning years of your mortgage, the bulk of your payment goes to pay off the interest. By prepaying and reducing the principal on your home, you can see an exponential effect over the life of your loan.
- Invest in Yourself
A tax refund could catapult you to the next level in your career. You could use the refund to pay for some courses at the local college or university. Take advantage of the Lifetime Learning Credit, and you may just be able to use the costs of the course to save money on your taxes next year.Using your tax refund to pay for tuition, additional training, a professional membership such as Toastmasters will be an investment that will pay off by creating better job security or better job.
Remembering that the refund is really your money, and not a gift from Uncle Sam, is really important. Don’t get caught treating your return differently than normal paycheck. Be sure to tell ever single dollar where it is going. The most important thing to remember, is that if you’re smart about it, you can put your refund to work for you and improve your situation financially now and in the future.
Question: Where are you planning to apply your tax refund? You can leave a comment by clicking here.