6 Smart Things To Do With Your Tax Refund
by Chris Bibey
Filed under Taxes
With tax season coming to an end, there is a good chance that you have already received a refund from the IRS and/or your state tax agency. Hopefully, you didn’t run to the mall and spend your refund the moment that it hit your bank account. If you have your refund money in hand or are expecting to receive it in the weeks to come, it is important that you have a plan in mind. This will feel like “found money” and if you are smart you can put it to work for you.
Here are 6 smart things to do with your tax refund:
1. Start an emergency fund. Even though the economy is improving, you should still have an emergency fund in case something goes terribly wrong. Most advisors suggest approximately six to eight months worth of living expenses. The best place to keep your emergency fund is in an online savings account with a bank such as HSBC or ING Direct. This gives you easy access to your money, while earning as much interest as possible.
2. Start or add to your IRA. No matter if you need to start saving for retirement or just want to add some more money to what you have, putting your refund into an IRA is a very good idea. This may not be the fun thing to do right now, but a few hundred dollars invested today will be worth much more down the line.
3. Invest in a mutual fund. Okay, this one may not be for amateurs, but if you do a little bit of research, you can take advantage of this investment vehicle. To get a better idea of where to start, check out our review of ShareBuilder as well as this page from their site.
4. Get that business up and running. Have you been looking for seed money to take your business to the next level? Do you have a venture that you want to start? Any amount of money from the IRS in the form of a tax refund can be used to get you moving in the right direction. This is a great thing to do with your money because it can help you earn even more income in the future. Not to mention the fact that it will afford you more deductions on next year’s return.
5. Improve your home. Do you need a new roof? Is your kitchen outdated? Could new energy efficient appliances save you a lot of money on the cost of utilities? Home improvement projects can immediately increase the value of your property. Along with this, they will give you a more comfortable place to live.
6. Pay Off Debt! This is one of the smartest things you can do with your tax refund. When you have a bunch of savings in the bank and a lot of debt to go with it, it’s like you’re borrowing money against yourself. If you’ve got a credit card balance that’s been lingering around since Christmas, use your tax refund to pay it down or pay it off completely.
A Few Not-So-Smart Ideas
Now that you know of a few responsible ways to spend your tax refund, let’s take a quick look at some not-so-smart ideas:
1. Go to the mall and blow it all. Although this may not be the best idea, it is sure to give you an adrenaline rush and put a smile on your face.
2. Loan the money to a friend or family member who is “in need.” You paid extra money in taxes throughout the year. This is why you received a refund. This is your money, and you should treat it as such. There is nothing wrong with helping somebody out, but remember this: money that you loan to a friend or family member may never be seen again and you might be enabling them if they are constantly mishandling their money and asking people for a “loan.”
3. Buy a new car. Depending on the size of your refund, you may be tempted to head for the car lot and pick out a shiny new machine. Again, this may make you happy in the short term, but soon enough you will realize that it was a mistake. A car is a depreciating item that often times calls for big repair costs.
What do you usually do with your tax refund? Are you smart with your money? Or do you tend to quickly spend your refund?
(photo credit: stopnlook)
Good list. I sure like the idea of paying off high interest debt. Just think about a 20% credit card bill. Where else can you invest your money and get a 20% return?
If you missed out paying or filing late taxes for the previous year, it is still possible to work it out.
I usually immediately transfer the money to my paltry savings account and pretend that I never received a refund. Did just that in February to help replenish the account from recently getting a new driveway.
I wish I woul have money coming to me this year in a refund bu I dont. Last year, I did and used it to pay one month extra in my mortgage. I first found out that there was no prepayment penalty which there wasnt and I did this as a cushion but also as a way to reduce my overall money owed at the end of my mortgage.
Not a bad idea, but paying off the mortgage quicker won’t save money for everyone. Really depends on the interest rate. Ours is now under 4% (1 year arm), so my money is better invested elsewhere than paying down the mortgage. But excellent in times of higher interest rates as it’ll save a lot of money in the long run.
Straight to ING- if CD rates were better I’d put it in one of those.
Try as I might, I adjust my withholdings every year to put more money in my paycheck and break even on taxes and not give the government an interest free loan, but I still end up getting a refund. I use it to pay my NFL season tickets which are due in March. Any left over goes into savings.
I personally do not have any refund coming back, but if I did I would be paying down my debt!
I never think of my refund as extra money to spend, it just goes into my savings account. For me, spending money as soon as it comes in is a good way to not have savings.
I wish could apply my tax refund $$$ to anything on the list, but as always something happens and something comes due, hopefully someday that will change.
I’m GLAD that we don’t have a refund. As painful as the check is to write, I know that we were able to use our money all year without loaning it interest free to the government. It still amazes me that people think it’s “found” money. Such a waste.
So true!!! I am glad somebody mentioned it. Getting a tax refund from the government is not a good thing as it is your money to begin with. You let the government use your money without paying interest. What a rip-off. :)
I understand the principle for sure, and I even agree with it – but I can live with knowing that I gave them an interest free loan and I didn’t have the miserable experience of actually writing a check. That makes me so unhappy and outs me in such a bad mood that I’ll happily make the tradeoff.
I agree. Even though it is essentially an interest free loan to the government, how much interest are you really losing out on with the interest rates that banks pay out? I have owed money and received refunds and it is much more painful to write out that check to the government on April 15 than it is to think about the few dollars in interest I lost out on.
Well, I didn’t pay extra money to the IRS last year. The refund that I got was from the “Make Work Pay” credit, which is a little over 100 dollars. I used half of it to get myself a comfortable chair because my old one has been literally a pain in the ass. The rest I put in Wachovia’s Way2save saving account.
Sounds like money well spent to me. Being comfortable is an investment in your health. My next furniture purchase will be a new bed as the current one is giving me back pain and is already 10 years old. I thought of using my tax refund on it, but as my situation is a bit up in the air right now, I thought it be better to save all of it in case it’s needed.