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5 Smart Ways to Spend a Tax Refund

Getting a tax refund? Here are 5 smart ways to spend it so you improve your personal finances, rather than hurt them.

By
Laura Adams, MBA,

5 Best Ways to Spend a Tax RefundIf you look forward to getting a tax refund every year, remember that it’s not a gift from Uncle Sam. You probably worked hard to earn that money last year, or you qualified for some big tax deductions, or both.

So before you spend your tax refund on something frivolous, consider 5 smart options for using it that could dramatically improve your personal finances:

Option #1: Build Your Emergency Fund

If you don’t have at least one month’s living expenses saved up, use your tax refund to start an emergency fund—or to boost your current savings.

See also: 3 Emergency Fund Mistakes to Avoid

 

Make a goal to accumulate a minimum of 3 to 6 months’ worth of living expenses in an FDIC-insured bank savings account. Having a healthy emergency fund gives you peace of mind and financial protection against the unexpected, such as a broken-down car, a high medical bill, or lost income.

Option #2: Pay Down Credit Cards

Do you have expensive, high-interest credit card debt? Kill it with your tax refund!

See also: The Credit Score Survival Kit – a free video tutorial to build credit fast

 

Even if you can’t pay off all your cards, cutting your balances reduces the amount of interest you have to pay. Plus, you’ll also improve your credit utilization ratio, which helps increase your credit scores!

Option #3: Pay Down Loans

Maybe you have installment debt weighing you down, such as a student loan, mortgage, or car loan.

See also: How to Pay Lower Interest Rates on Debt

 

Let’s say you have a $20,000 car loan that charges 6% annual interest, and you’re 10 months into a 60-month term. If you got a $2,500 tax refund and used it to pay down the loan, that payment alone would save you over $650 in interest. Plus, you’d pay off the loan 8 months earlier!

Option #4: Fund a Retirement Account

It’s smart to use a tax refund to fund an Individual Retirement Arrangement or IRA. For 2015, you can contribute up to $5,500 (or $6,500 if you’re age 50 or older) to a traditional or a Roth IRA. Check out 10 IRA Facts Everyone Should Know for more.

Option #5: Save For a Special Occasion

It you have short-term savings goals, such as taking a vacation or creating a cushy holiday gift fund, you could use all or a portion your tax refund to achieve them.

Use a bank savings account that’s separate from your everyday checking or payment account, so you’re never tempted to spend it.

How to Adjust Your Tax Withholding

If you receive a large tax refund year after year, it may mean that too much tax is being withheld from your paycheck throughout the year. Instead, adjust your withholding so you increase your paycheck and put the extra money aside into savings or investments to build wealth.

Use the IRS Withholding Calculator to help complete a new Form W-4Employee's Withholding Allowance Certificate, for your employer.

Other Money Resources You Might Like

5 Problems With Tax Refunds

3 Money Mindset Tips and Tools for Financial Success

Best Tips to Improve Your Credit Score

25+ Best Financial and Productivity Tools

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