Spend Your Tax Refund Wisely

by Junior Boomer on May 6, 2011

As much as you might dread preparing your taxes, receiving a tax refund makes it all worth it. Whether your refund is big or small, spend it wisely. Once you know how much money you’ll be getting back, make a plan for where all the money will go and stick to the plan. If you wait until the money is in your bank account, you will slowly whittle away at it before you get the chance to spend it on things you really need. As you make your plan, consider these wise ways to spend your tax return.

Pay off Debt

First and foremost, get rid of debt or at least pay it down substantially. Interest eats away at your money constantly, so paying off debt will give you the most bang for your buck. Compare all of your current debts and pay down those with the highest interest rates first. Consider the debt snow ball and pay off the smallest debts first. Credit cards usually have the highest interest rates, so you’ll probably want to start there. Also, pay down auto loans, student loans, payday loans, title loans and debt consolidation loans. You may even want to make an extra mortgage payment every year to payyou’re your home quicker and save yourself from paying a lot in interest.

Save

You can use your refund to bulk up your emergency fund (3-6 months of living expenses). This includes mortgage payments, utilities, food, and anything else you usually spend in a month. Put your emergency fund in a separate savings account than your other savings so that you will be less tempted to spend it. Once you have enough in your emergency fund, dump some into your savings. You may be saving for the holidays, a down payment on a home or car, large purchases or just to have a safety cushion for the future. Find the savings account with the highest interest rate possible.

Invest

If you like the possibility of making more money on your money and aren’t afraid of a little risk, invest it. Do your research and decide which investments are right for you. Roth IRA, traditional IRA, 529 college savings plans, and mutual funds are all excellent investment options.

Add to Retirement Account

While you’re investing, don’t forget about your retirement account. Putting in a little extra each time you get your tax refund will pay off immensely when you reach retirement age.

Educate Yourself

What better investment is there than an investment in yourself. Use some of your refund to go back to school for a higher degree if that interests you. If you already have your dream career, qualify yourself for raises and ladder climbs by receiving continuing education and additional training.

Start a Business

Now may be the perfect time to start the small business that you have been planning in your mind for years. Use your tax return as your initial capital and find investors who are looking for places to invest their own tax refunds.

Make Smart Purchases

Most of the above suggestions are smart, long-term decisions, but they don’t give you anything tangible short-term. Set aside a little of your tax return for tangible things that you can enjoy now. Let yourself splurge a little, but try to make smart purchases that will also pay off long-term. Home improvement projects or appliances are a great example of this kind of purchase. Spending the money on a new computer or lap top is also a great purchase. You may also want to put some of the money toward servicing your car to keep it in the best shape possible, saving you money in the long run. If you have enough left over to splurge a little, retailers usually have great sales around tax return time, including hotels and airlines. Go buy yourself a new suit for work or take your family on a much-needed vacation.

Donate

Making a charitable donation with part of your tax return will not only help those less fortunate, but may help you get a larger refund next year.

The amount you spend in each area depends on your financial situation. If you’ve paid off all of your debt, have a cushioned savings account and a healthy retirement fund, you may choose to invest most of it or just spend it all on smart purchases and splurges. But, at least evaluate your situation first. Don’t blow it all on a new boat if you’ve already got $25,000 in credit card debt. Happy spending!

About the Author: Whitney Freestone is a freelance writer. Freestone is an experienced business and financial writer. One of her areas of focus is car loan refinance.

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Frugal Living May 7, 2011 at 9:17 am

I am planning on spending my tax refund to invest in a new business

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