Most of us expect a pretty decent tax refund every year, and this is a nice incentive to look forward to after working hard the whole year and staying productive.
The size of the tax refund you should receive will depend on income levels, dependents, and various tax exemption statuses as well as the amount you withhold from your earnings throughout the year. Regardless of how much you will get back from taxes, however, this amount can be very beneficial and go a long way if you spend or invest it wisely.
What should I do with my tax refund?
Here are some of the options we’ll discuss:
- Pay off debt
- Build an emergency fund
- Invest it
- Take a vacation
The urge to splurge is a bit hard to resist for a lot of people when they get their refund money, especially for those who live paycheck-to-paycheck and do not always get to spend on things they really want but can’t afford outside of the basic necessities.
It doesn’t help that a lot of retailers also ramp up their discount sales and promotions during this time of the year, anticipating a surge in spending. Let’s talk about some responsible ways to use your refund before we get to the fun stuff.
Make Your Tax Refund Go A Long Way
Pay Off Debt with Your Tax Refund
However, you will appreciate your tax refund money more if you plan on spending it wisely instead of wasting it on impulsive purchases. One suggestion offered by a lot of financial advisers is paying down debt such as student loans, your mortgage or home equity line of credit, or a car loan.
Bad debts like credit card debt should especially be prioritized, as it is mostly used for personal consumption and comes with high interest rates (hence the label of “bad debt”). If you have more than one credit card, it is recommended to take care of the smaller balances first so they are paid off before ballooning to larger amounts; or, you can opt to split up the refund money and make payments towards all your cards. For more information about paying off debt, read about the snowball method.
Build an Emergency Fund
An emergency fund is something a lot of people do not think about, but a fund to use for unexpected expenses is very important and reduces a lot of anxiety and stress when faced with emergencies such as an illness, extended hospital stay, or a layoff from work.
You can use your refund money to start an emergency savings account apart from any existing savings you have (such as your retirement fund). This emergency fund will be your fallback for unplanned expenses.
Invest Your Tax Refund
Investments are not always the most popular options for using tax refunds because their benefits are not seen immediately. But a retirement plan, mutual funds, stocks, and other forms of financial investments are leverages for future financial security, and they are almost always wiser and more intelligent uses of money, whether it is from tax refunds or not.
Investments can also come by way of personal skills upgrades, such as taking certification courses or classes at a local college, or signing up for short- or long-term vocational courses that make you a more productive and qualified professional in your industry. That extra money you get from your tax refund can be used multiplied many times over through wise investment.
Take a Vacation
If all of the other areas of your life are in order, then maybe you need a vacation!
A vacation may not be at the top of your priority list at the moment, but taking time off and allowing your body, mind and spirit to recharge and refresh is also very important to maintaining your productivity and well-being.
When was the last time you took a vacation? You can use your refund money to book a getaway for you and your spouse or loved ones, and you will notice how rejuvenated you will be and ready for the demands and responsibilities of daily life.
Tax refunds are often looked down upon in the financial community because they are an interest-free loan to the government, but that doesn’t mean they can’t be used in a very positive way to put you into a better financial situation. If you get a nice, fat check in April, then make sure you spend it as wisely as you can.