10 Smart Things to do With Your Tax Refund

piggy bank

Now that Tax Day has once more officially come and gone, most taxpaying citizens have tallied up their yearly income taxes and mailed in the associated documentation. Many anxiously await their refund.

If you are among the many who will be receiving a tax refund this year, perhaps you’ve wondered how you should best handle that money. Let’s face it: the sudden arrival of some several thousand dollars can be overwhelming to even the most responsible person. Unfortunately, many people make irresponsible choices when it comes to spending their refund. Are you one of them?

Instead of throwing money away by making irrational purchases at this time, employ one or more of the following tips into your life, and spend your tax refund more wisely this year:

1. Pay off a credit card. First and foremost, apply the biggest chunk of your tax refund toward the credit card debt that is racking up the highest interest rate.

2. Open a savings account. Many people feel that getting a tax refund from the government is just like having a savings plan. Keep in mind that tax refunds are not gaining you any interest. Putting at least a small portion of your refund into a savings account is a smart way to start planning for the unexpected.

3. Change your withholdings. Although this is not advice about how to spend your tax return, if you are barely making ends meet from paycheck to paycheck, it may be time to change your withholdings status so that your paychecks increase. By putting a little money from your paychecks into a savings account, you will be growing your money much faster than waiting for next year’s tax return.

4. Pay off your car. Eliminate a monthly car payment and put more money in your pocket by paying off your car early.

5. Make an IRA contribution. Not only is it tax-deductible, but an IRA contribution will make you eligible to claim tax credit next year. This is an extremely valuable way to spend some of your tax refund. Making a $2,000 IRA contribution can add up to $1,300 in refunds next year!

6. Save for your children’s education. Hopefully, if you have children, you are already planning for their future. If not, a 529 savings plan is a state-sponsored plan that helps parents saving for college. 529 plans allow your savings to compound and you will not be charged taxes when the money is withdrawn, as long as it is used for educational purposes.

7. Pay extra toward your mortgage principal. Did you know that one additional principal payment per year can nearly cut your mortgage repayment time in half?

8. Pay off student loans. Making a significant one-lump-sum payment to pay off your student loans can be an extremely freeing experience. Even if your return doesn’t cover your entire student loan balance, bringing it down to a reasonable balance can make a world of difference for your credit score.

9. Educate yourself. If your credit history is in the clear and you don’t owe a lot of money to different people, consider continuing your own education in order to increase your earning potential in the future.

10. Take a family vacation. As long as you have made several responsible choices regarding portions of your tax refund, you may be able to take some of the money and enjoy a family getaway.

We all know that money isn’t everything, but it does in many ways make the world go round. Responsibly attend to your most pressing financial obligations first, and then, if possible, give yourself and your family a reward for all of your hard-working efforts.

Photo courtesy of Alan Cleaver

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One Response to 10 Smart Things to do With Your Tax Refund

  1. Pingback: Can I Keep My Tax Refund if I File for Chapter 13 Bankruptcy? | Veitengruber Law

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