Smart Ways to Use Your Tax Refund

Tax season is upon us. Over the coming weeks, millions of Americans will submit their 1040s and other documents to the IRS. Some will have to pony up for their tax bill. But for those of us lucky enough to be getting a refund (small or large), what’s the best thing to do with it?

That depends on your situation. All You lists 10 smart ways to spend your tax refund:

1. Set up a rainy-day fund

2. Fight credit card debt

3. Refinance your home

4. Pad your nest egg

5. Go green to save

6. Put it away for college

7. Splurge — smartly

8. Invest in your health

9. Take a class

10. Give it away

These are all great options for dealing with your refund. I’m sure if you got creative you could think of other uses as well.

For the beginner just starting out, I recommend setting aside $1,000 in an emergency fund before you do anything else. Don’t do anything crazy with that money — just park it in an online savings account. This is so important because unexpected expenses pop up in life. Cars break down. You or a child could get sick and incur hospital bills. You might be faced with unemployment one day. Drawing on your emergency fund in these situations is a much better option than relying on credit cards with 15% interest or more. Read more about building an emergency fund here.

A couple years ago my wife and I received a pretty nice size refund that we weren’t expecting. It was fairly early in our marriage and we were just starting to get our finances in order. We knew the importance of having an emergency fund, but a costly car repair months earlier all but wiped out our savings. So that year we used our refund to rebuild our emergency fund.

If you already have a sizable emergency fund, focus on paying off high-interest debt. This includes credit cards and private student loans. Only after you have done this should you consider any of the other options above.

I like the idea of investing in yourself by taking a class or improving your health. The article mentions joining a gym, but I think a good pair of running shoes is a better buy. The outdoors is all the gym you need if you’re creative.

Some of these options might not sound particularly exotic — paying off credit card debt, for example, isn’t the most glamorous thing to do. But it will put you in a much better position. Success in personal finance often requires you to choose the “dull” option even if you are tempted otherwise.

This year we’re also getting a refund, but it will be somewhat smaller than prior years. I plan to use it to open a Roth IRA at Vanguard. Whatever you do with your refund, use it as an opportunity to better yourself or your situation.

Photo by JD Hancock

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