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How To Spend Your Tax Refund Wisely

With tax filing season in full swing, some have already received their tax refunds, or will soon. A tax refund can be an opportunity to set yourself up in a better position for the future. If your tax refund is your only big windfall during the year, you might really want to spend it, and if so, you need to be strategic. Try to strike a balance between doing something fun and something responsible. Here are some ways to make the most out of your tax refund.

Pay Off High Interest Debt

If you have more than one credit card or other bills with high-interest rates, then consider paying off the bill with the highest interest rate first and the required minimum on the others. Chances are your credit card bill is bigger than your tax refund and you still have other bills with interest rates attached to them. If that’s the case, you might want to use the “snowball method”. This encourages paying off a bill with the lowest balance first, for a greater sense of progress.

Add To Your Emergency Fund

Financial experts have recommended that people put aside enough money for three to six months of expenses into a savings account for any emergencies that pop up. Even if your savings are close to zero, any amount you start with will help. Also, your tax refund could amount to a week’s or even a month’s worth of expenses. That’s a great foundation to build upon.

Add It to Your Retirementretired couple riding bikes

Retirement might seem like a long way off but don’t let that fool you into thinking it is. You can use the funds to contribute to a Roth or traditional IRA, to be better prepared for when you retire. At that point, you’ll probably be grateful that you had the foresight to save for retirement rather than spend it on something you’d have long since forgotten about.

Prepay Your Mortgage

Making extra payments on your mortgage can be a great way to save money over the long term. Because so much of your payment on a long-term note goes to pay off the interest, reducing the principal can have an exponential effect over the life of the loan. Even an extra payment or two now can make a big difference in your future obligation.

Start A College Fund

If you have children or grandchildren, you’d be doing them a huge favor by saving your refund in a college fund for their benefit. Setting up a 529 plan can help them afford a higher education and, in some cases, you may qualify for a deduction on your state income taxes.

Invest In Your Homecouple painting walls

Your tax refund isn’t going to get you a new kitchen or bathroom, but it can open the door to smaller remodeling projects on your home improvement to-do list. Some upgrades could even save you money down the road, like replacing your old appliances with energy-efficient models or swapping out that drafty entry door. Also, replacing a tired-looking backsplash, getting new faucets, or adding a coat of paint to well-worn walls can do wonders for a home.

Invest In Your Family

The main reason we work is to care for the needs of our loved ones. So, it’s no wonder that we think of them when we receive a tax refund. When we have their physical needs covered, sometimes the best thing we can provide them with is time spent together doing something fun. In fact, research shows that experiential purchases contribute more to our overall happiness than material purchases.

No matter how you spend, or save, your tax refund, avoid simply sticking it in an account where you won’t earn interest. We offer a variety of accounts that you can earn interest on, including Money Markets, CDs, and Checking.


Sources & enhancements by Credit Union of Denver

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