Rags To Riches: How To Best Use Your Tax Refund

It’s that time of year again… tax season! For many, this means an exciting tax refund. While it can be tempting to take this cash windfall and splurge on a shopping spree, you may want to reconsider. There are a number of great ways to use this influx of cash to improve your financial situation. Below are some smart uses for your tax refund you may want to consider:

Pay Off Debt

One of the best ways to use your tax refund is to put it towards debt repayment. Consider putting it towards the highest interest debt you owe, as this will save you the most money in the long run.

Top Up Your Emergency Fund

If you’ve recently had to dip into your emergency fund (or haven’t even started one), your tax refund can be a great way to top it back up again. Remember, it is generally recommended that you have at least 3-6 months’ worth of savings in your emergency fund!

Invest

Whether a Roth IRA, stocks, bonds, or mutual funds, your investment options are nearly endless. The opportunity to earn even more money can be a great use of your tax refund. If you’re new to investing and not sure what options make the most sense for you, consider talking a financial planner or investment advisor.

Put It Towards Your Children’s Future

If you have children, you can do them a huge favor by using your tax refund to set up a 529 College Savings Plan.

"There are people who have money and people who are rich"

-Coco Chanel

Make Home Improvements

Try to limit your spending to needed improvements, such as a new roof or more energy efficient windows. Also consider whether you’ll see an ROI on your investment. For instance, kitchen and bathroom improvements tend to have the highest returns on investment. Remember, your home is an investment, and at the end of the day, if you are going to be spending money on it, you want to ensure you are increasing your property value.

Save

Don’t feel like you necessarily need to do anything exciting with the money! Simply putting it in your savings account is still a responsible use of the money. However, don’t do this if you have more pressing financial matters to attend to such as multiple debts owed, as you want to avoid paying more interest than necessary on those debts.

Donate to Charity

Rather than several smaller charitable contributions throughout the year, you may find it more manageable to earmark your tax refund as a yearly lump sum contribution to your favorite charity.

While these options may not feel as “fun” as a last-minute weekend getaway or new handbag, your future self will thank you for making responsible financial decisions. Of course, if your plan all along was to use your tax refund for a big expense you’ve been considering for a long time, there’s nothing wrong with that! Just try to avoid blowing it on impulse purchases and first consider whether any of the above options make more sense for your financial well-being. Happy tax season!