5 Ways to Use Your Tax Refund Wisely

After all the talk about Trump tax reform, you were worried about tax time. Will you owe? Or will you get a refund? But you got a tax refund! Phew. Getting back a chunk of change can be a relief and also cause for celebration. But before you start popping off the bubbly, think about how you can get the most out of your tax refund. We got you covered. Here are five ways you can use your tax refund wisely.

1. Pad that emergency fund

Do you have a low or no emergency fund? Then taking your tax refund to pad your emergency fund is a good idea. Why? Because emergencies happen to everyone at some point. There’s no avoiding it and being financially prepared can make it an annoyance and not a disaster.

Put money in a high-yield savings account so you’re earning interest on it. You can create a separate online savings account for your emergency fund so you’re not tempted to touch it. It’s advised to save three to six months of expenses in your emergency fund. If you have no emergency fund, your tax refund can be a nice start. If you already have some saved, this can help it be even more solid.

2. Pay down high-interest debt

Got credit card debt? It’s time to pay that baby down! Credit card interest rates are high and can cost you a lot in interest over time. If you can pay off your credit card debt with your tax refund, say thank you, next, to debt. Even if your tax refund can only cover a portion of it, it will help you get out of debt even faster.

If you have student loans, especially Grad PLUS loans, paying back debt with your tax refund can make sense too. The key is to focus on your highest interest debt, so you’ll pay less over the life of the loan.

After paying down debt, make sure you address why you got into debt in the first place. If you don’t, you’ll likely just head back into debt.

3. Boost your retirement savings

Retirement savings won’t just happen “one day” or “eventually”. You need to make it happen. What a better way to get started than with a tax refund? Boost your retirement savings with that extra money.

Depending on the size of your refund, you may be able to max out your Traditional or Roth IRA. You can also look into putting more into your 401(k), too. A tax refund is essentially a windfall of cash, so putting that toward retirement now, means paying less later. If you think it’s hard to be broke now, imagine being broke in your Golden Years. Not something you really want to entertain, so take action!

4. Save it for big ticket purchases

Is your decade-old car on the fritz? Is your old laptop that has the letter “r” missing, with other letters faded off the keyboard, going incredibly slow? So slow you feel like you’re in dial-up era?

If this is the case, putting your refund toward a big ticket purchase item that you need can help. You typically know that eventually you’ll need a new or new-to-you used car, or laptop, or deposit for rent if you plan on moving. Look into what big ticket items are needed in the future and what other items might need to be replaced in the next year. Having your tax refund may just help you afford some of the items you need but can’t quite afford yet on your own.

5. Do a hybrid method

When you get your refund, doing the “responsible” thing is no fun. We get it. Why not try a hybrid approach where you’re paying down debt, saving, and having some fun?

So maybe you’re putting 33% toward debt, 33% toward emergency fund or retirement and 33% for a nice local vacation or massage or some other treat. This way, you’re spending your tax refund wisely because you’re striving toward your financial goals, but you’re also having some fun too.

You can rearrange the percentages but doing the hybrid method ensures that some money is going into each bucket of your finances.

Bottom line

If you have a tax refund, don’t spend it right away or all in one place. Consider these options on how to spend it. Think about your short-term and long-term goals to understand how your money can best be invested. What will spark joy? What brings the best ROI? What will help move the needle on your goals and help you sleep better at night?