Tax refunds may be the most (okay fine, the only) exciting part of doing taxes. But avoiding the urge to splurge will keep you from making a choice you may regret down the line. Even if you’re itching to spend your tax refund on a luxurious item, take the time to reflect on how you may be able to make wiser decisions.
Think of it this way: You’ll only get to use this tax refund once! So, why not give your savings some love? Maybe even start that emergency fund you’ve been meaning to get to. Better yet, your debt needs you! There are a few ways you can spend your refund wisely. It doesn’t have to just go toward materialistic needs.
NOTE: A large tax refund isn’t always a positive thing. If it seems overly large, your employer may be withholding too much from your paychecks. Even though it’s always nice to get a little gift for tax season, it can be better to have that money back month-to-month during the year.
Method 1: Use your tax refund to pay off debt
Paying off your debt with your tax refund is the wisest thing you can do when you get that check.
Whether you have credit card debt, student loan debt, or you’re behind on any other payments, the absolute best use for your tax refund is paying back your lenders. No, it’s not the most fun thing to spend your money on. But in the end, you will have more financial freedom.
TIP: When you use this method, make the payment as soon as possible. Otherwise, you will owe more interest on what you could have paid off quickly with the refund.
Method 2: Save your tax refund
The best home for your tax refund may just be in the bank.
Can you hear that? It’s your savings account calling. It’s been a long time. If you are one of the lucky people without serious debt issues, saving your tax refund is the second-best option for your tax refund. Even if you do have debt, it’s beneficial to put away at least some of your refund for emergencies so you don’t dig yourself further into debt in the future.
TIP: If you don’t have a savings account already, shop around for one with a high interest rate and low fees. You want your money to make money, not just sit there!
Method 3: Use your tax refund to buy a home
Your tax refund might give you the boost you need for a down payment on a new home.
If you’re having trouble qualifying for a mortgage loan because of debt, refer to method 1. If not, consider using your tax refund to help with closing costs on a new home. Down payments and closing costs can be some of the biggest obstacles between you and your dream house, so take advantage of a large tax refund when you get it.
TIP: Although using your whole tax refund on a down payment may help in the future, keep some for yourself if your budget is tight now or if you have no emergency fund.
Method 4: Use your tax refund to pay down your auto loan
Car loan rates are around 6.61% and 11.74%. Tackle that debt faster with the extra cash.
First, wait for your check to arrive. You’ll want an accurate number of how much money you can use. Then, plug that number into our auto loan calculator to see how much of a dent it can make in the car note.
When you know the impact you can make, start chipping away even further. You can make a principal payment to focus on the actual amount you owe and not the interest you’re being charged on the loan.
TIP: If you decide just to use your tax refund for monthly payments, keep your monthly budget in mind. Once the refund well has run dry, will you have enough to cover the payments?
