You’ve worked hard all year. You’ve paid the legally required percentage of your income to Uncle Sam. When tax time comes, you find that you’re getting a refund. That’s great! But what are you going to do with it? Few people have trouble finding something to do with their tax refunds. But frequently, that “something” is spending it with reckless abandon. Sure, it feels good to buy some shiny new things. But there are more productive things we could do with that money.
Pay Off Debt
Some refund recipients dedicate all or part of their tax refund to paying off debts. Depending on the amount of debt you’re in and the amount of your refund, this could save you lots of money in interest payments. For maximum impact, it’s best to use your refund to pay down the debt with the highest interest first. If you get that one paid in full and still have some money left over, move on to the one with the next highest interest rate.
Start An Emergency Fund
Another smart thing to do with your tax refund is starting an emergency fund. Everyone needs a financial cushion in case of emergency or job loss. If you don’t already have one, a tax refund could give you a good start on it. But a tax refund is rarely enough to make up the three to six months’ worth of income that we should put away, so you’ll probably have to add a little more to it each time you get paid.
Start Investing
If you’re debt-free and already have an emergency fund, investing your tax refund may be a good strategy. You could put it in an existing retirement or college fund or use it to start a new one. You could purchase stocks and bonds with it. Or you could put it into an annuity. Investing your tax refund will allow your money to grow.
Prepay Bills
Another thing that some taxpayers do with their refunds is prepay their bills. This will give you peace of mind for months to come, because you won’t have to worry about being late with your payment, or even being unable to come up with the money to pay a bill. Most utility companies will allow you to do this.
Pay For Needed Repairs
Sometimes there is a legitimate reason for spending your tax refund on consumer goods. Perhaps your refrigerator is on the blink, or your car has seen its better days. Of course it’s always best to make repairs if possible, but in some cases we may not be able to justify the cost of repair because the item is very old or in poor condition. In these and similar situations, making that purchase (or putting a down payment on it) may be a wise way to use your refund.
When we receive our tax refunds, visions of things we want often start running through our minds. But going on a spending spree is not usually the wisest way to put that money to use. Instead of blowing it, why not use it to make your life less stressful?
Reader Questions:
1. Are you anticipating a tax refund this year?
2. If so, how are you going to spend it?
{ 8 comments… read them below or add one }
Great article. My first impulse is to buy a new toy for myself but I try not to let my impulses get the best of me. This year I’ve decided to put my tax return toward rent. It feels good to have that sense of “it’s paid for” for as long as it lasts. Not having to budget a significant chunk of your paycheck sure feels good too. It also gives me time to reassess my finances and see where I can make improvements.
Hopefully I’ll be getting a nice refund this year, and I think I’m going to put it into starting an emergency fund – a small measure of security I’ve never been able to have in the past.
I hope I can get my tax refund soon. What did you do with yours immediately after receiving it? I’d probably place it in a bank first before spending lavishly.
Thanks for the post! Reminds me of my tax refund now.
-Willie
We probably won’t get much of a tax refund. We plan on making more money this year so we’ll probably use part of the refund to pay our estimated taxes.
I agree with Kurt, and it’s something I intend to do once my taxes are done. Because of a rental home, we’ve had two years of unexpected refunds so this year I need to calculate a revised W-4 form and quit loaning my money out interest free.
One thing I’d suggest adding to the list if you’ll get a sizable tax refund for 2011: Head to your employer’s payroll office and submit a revised W-4 form. Once you see by how much your take home pay increases–say it’s $50 per paycheck–go back to payroll and set up an automatic payroll deduction of $50 per check that goes directly into a your own savings account. Now your take home pay is the same as to what you’d been accustomed, but you’re saving regularly and earning a little interest on those savings. Great way to get started on saving for an emergency fund if you don’t have one, or to save for any other particular goal.
I have already planned to do most of the things mentioned in the article except the investment part, I’m not quite ready for that yet but if I have enough left I will do it. I will start my emergency fund, payoff debt and pay up my monthly utilities.
We usually use our tax refund for Investing. Its usually for a short term goal. thistime its for saving up to buy an investment property overseas.