Getting a tax refund is always a great feeling. But what should you do with it? While the first thing you might be tempted to do is spend it on a splurge for yourself, here are a few other options you might want to consider.
Start an Emergency Fund. If you don’t have one, this kind of account is critical. If you already have one, add to it. Online savings accounts that are interest bearing or money market accounts are your best bets. You can’t control the future, which is why being prepared is your best defense.
Pay Off Debt. Whether it’s a credit card, student loan or car loan, paying on – or eliminating – the account with the highest interest is best. Becoming debt free not only provides emotional relief, it’s also the key to financial freedom.
Start Saving for Specific Dreams. Do you want to travel? Buy a new car? Make a home improvement? You can either put your entire refund toward one of your life goals, or break it up into different buckets. This way, not only are you being disciplined and mindful, but you’ll also avoid taking on future debt. Most importantly, you’re taking intentional steps toward making your dreams come true.
Refinance Your Mortgage. When you do this, you still have to pay closing costs and fees, but your refund can contribute to or cover this entirely. Plus, you can potentially save a lot of money each year on mortgage interest. You’ll thank your future self for this move.
Start a College Fund. With costs skyrocketing, this might be one of the best gifts you can give your kids or grandkids. Set up a 529 plan, a tax-advantaged investment vehicle designed to encourage savings for a designated beneficiary’s higher education expenses. The best thing about this is that you might be eligible to deduct it from your state income taxes. Thinking ahead pays off in the long run.
Kick Your Career Up a Notch. If it seems like your colleagues are getting promotions and raises because they have a certain skill, then use your refund to enroll in a class and catch up. One of the cool things about this is that you can take advantage of a Lifetime Learning credit and claim it on your taxes. Remember, you’re worth it.
Donate to a Charity. What are you passionate about? Giving to a cause you believe in not only helps others, you can also use it as a deduction on your taxes. Doing good for those in need always feels good.
Put it Toward Your Retirement. Though you might be years away from retirement, it will be here before you know it. Use your refund money to purchase or add to a Roth or traditional IRA. That irresistible thing you might be tempted to blow your money on today will be long forgotten by the time you retire.
The truth is, what you do with your tax refund is up to you. However, putting it toward something that has a long-term pay out or represents a significant goal can be a very smart thing to do.