How to Spend Your Income Tax Refund Wisely

When you get your tax refund back you may be instantly tempted to spend it on an item or trip you’ve been wanting for a while. However, if you receive money back from the government, there are wiser ways to use your income tax refund.

Pay off high interest debts

Getting your refund is the perfect time to put a dent in any debt you have, especially if the debt has a higher than average interest rate. Although you won’t experience the instant gratification you’d get from spending it, paying off your debt will set you up for a stronger financial future. When you do pay off your debt, you’ll definitely be excited.

Build up your emergency fund  

It’s a good idea to have 3 to 6 months’ worth of expenses saved up in case of emergency. If your emergency fund is lacking, go ahead and place some or all of your refund into your emergency fund. You’ll thank yourself later when the money is there when you need it.

Add to your retirement savings

Everyone wants a comfortable retirement but oftentimes people fall short because they didn’t save enough or start saving sooner. So if your debts are taken care of and your emergency fund is padded, take advantage of your refund by opening a Roth IRA or other type of retirement savings account. Over the course of the year you can continually add to it and when it comes time to retire, your tax refund will hopefully grow and be worth more than the amount of your original refund.

Refinance or pay down your mortgage

You’ll need to ask your lender if there are any prepayment penalties associated with your particular loan. If not, go ahead and put your tax refund towards the principal balance of your loan. If it makes more sense for you to refinance, put your refund towards the closing costs of refinancing your mortgage.

Make home improvements

It’s sometimes said you have to spend money to save money and if you can spend your tax refund to save you more money in the future, then go ahead. For instance, get those repairs done on your car, or replace the refrigerator if it’s constantly breaking down. You’ll spend more upfront, but the less you spend on constant repairs will save you money in the long run.

Save for college

Whether you have children and want to help them with their college tuition, or you want to head back to school yourself, you can use your refund for educational expenses. If it’s for your kids, consider opening a 529 Qualified State Tuition Plan.

Spend it

There are wise ways to spend your tax refund. If you’ve covered all of these bases then by all means spend it on the vacation you’ve been wanting or the new television you’ve been eyeing.

How will you spend your income tax refund?