5 Smart Ways to Spend Your Tax Refund

Before you make an impulsive decision with a large sum of cash, consider these smart ways to build your wealth.

Every year around tax time, I anxiously wait for a call from our CPA letting us know whether we owe or get a refund this year. It’s anxiety-inducing to say the least, but for the most part, we’ve been lucky enough to get a nice chunk of change deposited into our account — usually right before we have a major car repair — go figure!

As we’re paying for those perfectly timed {and usually unplanned} expenses, I have to admit I’m a little jealous of those who are able to spend their refund in a more exciting way. But while it might be more exciting at first glance, I know that it’s not always smart, especially if we have to make hard financial sacrifices in order to “keep up appearances.”

It’s frustrating to be responsible, yes? But I’m pretty sure you’ll find it’s more than worth it.

Here are the steps you need to tackle first, before using your tax refund toward a dream cruise, fancy car, or kitchen remodel. In fact, if you continue to use your resources wisely, you’ll be able to afford those fun things many times over — promise!

Start or Increase Your Emergency Fund

Emergency funds are essential to maintaining healthy finances — they help you prepare for the unexpected, and reduce the impact of a higher than normal bill. Without an emergency fund, both my husband and I would be in hot water, for sure!

If you don’t have an emergency fund set up yet,  tax time is the perfect opportunity to start. A general rule of thumb is to set a goal of $1,000, which might seem like a lot, especially if you’re struggling just to meet the day-to-day expenses. But if you can just put a few hundred dollars from your return toward establishing one, you’ll be better off than most.

After you’ve made it to the $1,000 mark, you can work on increasing your fund to be approximately three months worth of expenses {an extra safe zone}, or move on to Step 2. You also might want to reference 10 Smart Ways to Build an Emergency Fund for even more ideas on how to save.

Pay Down High Interest Debt

The next step is to work on paying off, or at least putting a good portion towards, high interest debt. These are things like credit cards, school loans, or any other outstanding debt you might have with a super high interest rate. The sooner you can get rid of these payments, the more money you’ll have available for other, and more important things!

It seems everyone has a differing opinion on whether you should pay off debt first, or start an emergency fund. Supporters of the emergency fund claim that if something catastrophic happens, you won’t have any money to cover it. Supporters of paying off debt first, especially high interest ones, claim that you’ll save more money in the long run by doing it this way.

No matter which way you choose, I honestly believe you won’t be doing it “wrong”. As long as you are steadily working toward a better financial future, you’ll be okay.

Build Your Savings Account

Once you’ve paid down high interest debt AND have at least a $1,000 emergency fund, it’s time to start building your savings account. This is the fun part, because you can start dreaming about all the different things you want to eventually purchase!

Some people prefer to open a separate savings account specifically for each item they are saving for, or designate various columns in the same account to keep track. Do what works best and makes the most sense to you.

Here are some ideas of what you might start saving for:

• A down payment for a home
• Being able to pay for your next car in cash
• A family vacation
• A much-needed remodel or repair for your home
• College tuition for your children

Your tax refund is an excellent resource to jumpstart any of the above goals, but if you want an even healthier savings, be sure to read 3 Surefire Ways to Increase Your Savings Account to reach those goals even faster.

Pay Down Longterm Debt

Interest rates for mortgages and car loans are generally lower than credit card rates, so the next step is to work on paying down those longer term debts that you’ve accumulated. It can seem really overwhelming to look at your mortgage and wonder how you’ll ever decrease it to a more manageable level, but even just one extra payment a year can have a big impact, and save a lot of interest! 

Something I find really helpful and motivating is to print out an amortization schedule in which I highlight the month any time a new payment is made. This shows me at a quick glance how many months I have left to pay, and encourages me to keep going until the loan is completely gone.

Invest in the Future

When you have all the previous steps completed {or at least a good start!}, it’s time to use that tax refund towards investments. In all honesty, I’m not an expert in this area, but I do know that it’s important to stash away some money for retirement whenever you can.

If you have a 401K through your employer, seriously consider adding a little bit more toward it this year, and if you don’t yet have a Traditional or Roth IRA, now might be the perfect time to open one. {Here’s a better explanation of both IRA’s, and the difference between them.} Certificates of Deposit are less popular, but may be worth looking into if you don’t need to access your tax money right away, and are still deciding the best course of action.

Any amount you contribute towards retirement is deductible on next year’s taxes, so it’s has an even bigger and better benefit beyond helping you prepare for the future.

It’s not often that we have extra cash at our disposal, so it’s even more important that we spend our tax refund without regret. These steps will give your money the best chance of success, and start you on the path toward true financial independence!

 

PIN for Later: