Tax refunds are great. They’re like finding money—in the laundry, on the sidewalk, in your jeans pocket…but 100 times better. Getting a tax refund can feel like winning the lottery, and the temptation to get carried away happens to the best of us. After all, it is your money, right? You saved it. Well, sort of.
Although it might be a yearly windfall for you, it is basically your money that the federal government has been holding on to, interest-free throughout the year. You can increase your withholdings and take more home each month, but if you like getting that big check every year—or if you’re afraid of owing money to Uncle Sam—here are a few tips on how to use that money.
1. Pare down your debt.
It’s easy to simply park that money in your checking account until you eventually spend it on whatever. If you don’t have a plan for it, you’ll probably spend it on incidentals, food, bills, or dinner out. A smarter plan would be to or relieve any burden of debt. Click here for a 3 popular strategies.
2. Save for an emergency.
According to the Federal Reserve, 40% of Americans don’t have enough savings to cover a $400 emergency expense. Now would be a perfect time to build a rainy day fund emergency savings account.
4. Make a timely investment.
Maybe it’s time to replace your kitchen appliances…or to get new furniture. Other things you may need include a down payment on a house, or an affordable new or used car. Consider these as a smart investment for your future.On the other hand, it’s perfectly OK to take a percentage of your refund and get yourself something nice. If so, try to limit it to 5-10% of your refund. Just make it a point to save the rest in a savings account.
5. Plan wisely for a vacation.
Hello Caribbean! Goodbye money. Try to avoid taking a spontaneous or expensive vacation using all of your refund. Instead of booking on a whim, plan wisely and think it through: Find a destination that won’t break the bank, or start a vacation fund.
6. Avoid the casino.
Are you tempted to take your tax return funds to your local casino to triple your windfall? You may justify this as money that you didn’t have anyway, so what have you got to lose? A lot. Gambling has no guaranteed rate of return. You’d be better off putting your money into a high-yield Share Certificate or another investment—even the stock market. The odds are better you’ll come out ahead over time.
7. Give it to your kids’ education.
Although it can be tempting to splurge on your kids, buying them the latest cell phone won’t help YOU achieve your savings goals. Instead, you could set up a 529 College Savings Account.
8. Don’t borrow against it.
Tax preparation businesses may offer you a refund anticipation loan or a rapid refund option. Remember that this is a loan which typically has an extremely high interest rate, and you may even have to pay an application fee. If you file electronically and have the money deposited directly into your account, your refund may not be any longer than a loan approval and disbursement. In a nutshell, refund anticipation loans are a bad idea.
Resources: The Motley Fool, The Balance, Money.com, NerdWallet, Inc.