Tax season is finally over, and hopefully you’re one of the lucky ones who is expecting a tax refund rather than one of those who has to send even more money to the IRS. But before you spend that money on a third 72″ LED for your yacht, there are several more sensible ways to use your refund.
The average refund for the 2013 filing season is $2,651, according to the Internal Revenue Service.
If you’re one of the more than 100-million taxpayers getting money back, here’s what to do so you don’t suck at spending your tax refund.
1. Pay Down Debt
Interest charges make it harder to pay down credit card debt, so this is the most important place to put your tax refund. Using your tax refund to pay down debt will mean you’ll save money on interest payments and probably lower your minimum payments due (though we hope you always try to pay more than the minimum), which will take pressure off your finances for months to come. Try BankRate.com’s credit card calculator to see how much you can save.
2. Emergency Fund
We know it’s not sexy, but an emergency fund is important for financial stability, and it will help you avoid slamming your credit cards. You should try to keep at least three to six months of expenses in a bank savings or money market account, the pros say, and then vow to never touch the money unless it’s a real emergency. The cash will come in handy if you lose your job or have an emergency home improvement.
3. Boost Your Retirement Nest Egg
Use your refund to contribute to an IRA. In 2014, you can save $5,500, or if you’re 50 or older, $6,500, to a traditional or a Roth IRA. If you choose the Roth, you’ll have a nice pot of tax-free money when you retire. Even if you never add to the account again, a one-time $2,000 contribution at 7 percent over 20 years will give you more than $8,000. A $5,500 contribution will give you more than $22,000. Or, choose the traditional IRA and you might be eligible for a tax write-off on your taxes next year.
4. Save For College
If college tuition bills are in your future, get a jump on saving by putting your tax refund into a 529 Plan. These savings vehicles allow money to grow tax-free, and as long as the funds are used for qualified education expenses, the money comes out tax-free. If you put $3,000 in a 529 now and it earns 7%, it will be worth $4,252 in five years, $6,028 in 10 years and $8,546 in 15 years. And that’s without adding anything further to the account.
5. Create a Fund For Anything
Maybe you have your eye on a new car, a home purchase, an island vacation or another big-ticket item. Now’s the time to get ahead in affording what you want. Stick your tax refund in a special account that’s earmarked for that goal. When you can, add more to it.
6. Give It Away
If you’re flush with new cash, consider making a contribution to your favorite charity. Or contact a local food pantry and see if you can do something to shore up its shelves. Plus, you’ll get a deduction to use on next year’s tax return.
7. Pay Your Insurance Premiums
Many consumers pay their auto insurance on a monthly basis because they don’t have the cash to pay it all upfront. Insurance companies add a fee for this convenience, and that means you’re paying more, overall, for your insurance. Instead, pay off the balance so you won’t have to pay those monthly fees.
8. Make an Extra Mortgage Payment (Or Two)
Consider sending your mortgage lender some extra money to pay down the principal on your loan. Use this calculator to see how much you can save in interest, and how many months or years you can shave off the term of your mortgage.
9. Do Those Home Repairs
Whether you’ve been putting off that new roof or remodeling a bathroom has been in your dreams, use your tax refund to get the job done. And if you can DIY some of the work you need, you could save lots of money.
10. Enjoy It
We wouldn’t suggest this for people with lots of credit card debt or other financial pressures, but if you’ve got debt and savings under control, simply enjoy some of your newfound cash. Don’t spend it all, but go on a (limited) shopping spree, take a trip, go to a fancy dinner. Whatever floats your boat. And then use the leftover money for one of our other suggestions.
BONUS: One Final Not-Sucky Suggestion
Finally, while it’s great to receive that fat check after filing your tax return, you’re still giving an interest-free loan to the Internal Revenue Service. Change your withholding if you expect your tax situation to be the same next year.
And if you’re saying, “Wait, I use this as a forced savings plan,” we have another idea. Adjust your withholding anyway, and then set up for automatic payments to come out of your checking account each week or month — equal to the extra money that will end up in your paycheck after your withholding change. Send the money to a money market account, and at least you’ll be getting some kind of interest on that money, rather than let the IRS babysit it for the next year.
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