Expecting a Tax Refund? Here are Six Smart Ways to Spend it

What would you do if you had a million dollars?  Or if you won the lottery?  Or if — in a twist of fate straight out of a Dickens novel — you inherited a small fortune courtesy of a wealthy, long-lost relative or anonymous benefactor?

Okay, so the likelihood of a multimillion-dollar inheritance or a winning lottery ticket is pretty slim – but it’s fun to think about.  Unrealistic, but fun. 

As tax season draws to a close, though, many of us will be working through a more realistic version of this scenario:  What to do with the funds from our income tax refund.  Of course, your tax refund check probably won’t be anywhere near a million dollars, but it’ll still be a large-ish sum of money with plenty of possible uses – some of them better than others. 

Want to make sure you make the most of your tax refund?  Keep reading for some savvy spending and saving ideas.

1.  Take a (small!) percentage and have fun.  I’m a big believer in the occasional splurge, as long as it’s responsible and relatively small.  That’s why I advocate taking a small amount of your tax refund – say, between 1 and 5% — and having fun with it.  Go out for a fancy dinner.  Get a great haircut.  Buy a box set of your favorite DVDs.  Do whatever you want.  But remember: Once your “fun money” is gone, it’s gone. 

2.  Pay off your credit card(s).  One of the smartest things you can do with a tax refund is using it to pay high-interest credit card debt.  If it’s possible to pay off your entire balance, go for it.  You’ll be glad you did. 

But even if you can’t pay the entire amount you owe, you can put a serious dent in your outstanding balance – and that can make it easier to pay off the rest with regular payments.

If you have credit card debt, I’d highly recommend using your refund for debt before you do anything else with it.   The money you save in interest alone will be worth it.  But if you don’t have credit card debt, or if you have funds left over after you pay off your cards, you can always . . .

3. Build up your emergency fund.  Any solid financial plan should include an emergency fund.  Ideally, your emergency fund should give you enough money to cover expenses for three to six months in the event of a financial crisis, such as illness or the loss of a job.  If you’ve paid off your debt, consider using a portion of your tax refund to build up your emergency fund. 

Don’t have an emergency fund?  Now’s the time to start one. 

4.  Invest in your health.  If you’ve been putting off pricy medical or dental procedures because of the cost, use your tax funds to get healthy.  It’s definitely worth it!

5.  Invest in your home.  Maybe you’ve been putting off a necessary home repair, like getting a new roof or replacing your aging furnace.  Maybe your refrigerator is on its last legs or your washing machine has been making a suspicious noise for the last six months.  A tax refund can provide you with an opportunity to take care of home maintenance costs – in cash.

6.  Save it.  Saving money is always a good idea.  And if you don’t have any debt to pay off; your emergency fund is in good shape; and you don’t have any medical or home-repair expenses to take care of, I recommend putting your tax refund in a savings account, where it can earn interest. 

If you want to make sure you don’t spend it on impulse purchases, open a new savings account that isn’t linked to your checking account.  That way, it’ll be harder to transfer funds.  Even better:  Start a savings account with an entirely different bank.

So, maybe you didn’t win the lottery or inherit a million bucks (of course, if you did, most of these suggestions would still apply).  But if you’re able to use your tax refund take a serious chunk out of your credit card debt or bulk up your savings or your emergency fund, I consider that a win. 

Happy tax season!