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6 Smart Ways to Spend Your Tax Refund

Updated on April 19, 2012

Are You Getting a Tax Refund?

Thousands of people are getting a tax refund this year and many of them have already spent it. It can be exciting to get several hundred or thousand dollars at one time, but you need to know how you will spend it before it arrives. It is too easy to waste it on frivolous things when there are better ways to use this extra money that you earned. Here are 6 of them.

1. Invest Your Refund

One of the best things you can do with your money is to make it grow. Talk to an investment professional and find the best options for your money. You can choose from stocks, bonds, CDs, and other investments to increase your profit.

While you can do the investing yourself, it's better to work with someone who knows about the market and where your money is safe and still growing.

Pay Off Debt

Reduce your overall debt with any extra money you get. Using your tax refund to pay off credit cards, car loans, and other debt is smart. It will reduce your monthly expenses and improve your credit score while saving you money in interest.

You have two options for reducing your debt with your tax refund. You can pay off small bills first so that you have fewer monthly bills and you can add the extra to the payment on your larger bills. You can also pay off the debts with the highest interest rate to save more money at the start. There are pros and cons to each, but you have to choose the one that works best for you.

Start or Add to a Savings Account

If you do not have a savings account, open one with your refund. You need to have at least $1,000 for an emergency fund. This will help you handle unexpected expenses without resorting to credit. Once you have the emergency fund, you should aim to save between 3 and 6 months of expenses in case of lost time from work.

You will want this money to be in an account that can easily be liquidated when needed. It will probably not earn you very much money, but you can shop around to find the best rates. A money market account usually pays a slightly higher rate than a traditional savings account.

If you do not have any savings, this would be the best use for your tax refund.

Use Your Refund for Large Purchases

Do you need a car? Put your refund towards the downpayment. If you don't need one this year, save it each year so you can purchase a car with cash instead of credit.

Other large purchases that you may want to save your refund for include a new furnace or air conditioner, or even a downpayment on a home. By looking ahead for the next few years, you can start saving and reduce the amount of credit you use.

Home Improvements

If your home is in need of serious repairs, this would be a good time to start making them. If you are just looking at improving your home, your refund can also help you do that. For improvements, the best way to spend your money is to choose things that raise the value of your home. It could be updating your kitchen or bath or installing energy-efficient windows throughout the house.

Save for College

Start saving for your child's college education with your tax refund. You can open a college savings account and add to it each year. If your kids are grown, you can add it to your retirement. The important thing is to save for the future.

Enjoying Your Tax Refund

These 6 options are not glamorous or fun, but they are smart ways to spend your tax refund. Yes, it's okay to do something special for yourself like a dinner out, but the majority of the money should be spent wisely. You will enjoy the benefits of any of these options in the future.


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    • suzettenaples profile image

      Suzette Walker 5 years ago from Taos, NM

      Excellent advice and information. We all need ideas of what to do with our tax refund check rather than needlessly spending it. Well done!