Getting your tax return can be very exciting and the temptation to blow it all on something fun is immediate. However, there are several smarter things you can do with that money that will benefit you more in the long run. If you’re serious about making smart financial decisions, then check out the following best ways to spend your tax refund.
Pay Off Debt
One of the smartest things you can do with a tax refund is to put it towards an outstanding balance that you owe. Whether it’s a credit card, a student loan, a car loan or some other type of debt, you’ll be saving yourself a lot of money in the long run when you consider all the interest you’d end up paying if you took years to pay that debt off. Paying off the debt with the highest interest rate is usually the best way to go.
Keep in mind, however, that you shouldn’t send in one single payment blindly. First, find out if there are any fees or penalties for early repayment. If you’re in the clear, then call up the lender and ask if you can negotiate for a lower repayment total in exchange for paying it off all at once. (Also read: Easy & Effective Debt Reduction Plan.)
If possible, have your refund sent straight to your savings account (or transfer it there as soon as it arrives in your checking account). Let it accrue interest and be a “rainy day fund” for when you have an emergency such as an unexpected medical bill or car repairs. You can also set up an IRA account or put it into a college savings fund for your children.
Have you always wanted to try your hand at investing? A tax refund may provide the perfect opportunity for you to give it a go. To make the most of your tax return dollars, make sure you’re making smart investments from the get-go. Beginners need to talk to a financial adviser and read up on various investment options. A popular starting point is online trading, which is easy to do and can be done at a low-risk level. (Also read: Tips For Creating A Great Investment Portfolio.)
Improve Your Home
Investing in your home is another smart move for spending those tax refund dollars wisely. Have two goals in mind when deciding which improvements to make. First, the repairs or upgrades should increase the value of your home, which is likely your largest asset. Second, look for ways to upgrade your home that will help pay for themselves. Energy savings is a great example. Get new windows or insulation to prevent heat loss or install solar panels on your roof. Keep track of your expenditures during these upgrades since some repairs are tax-deductible.
Start A Business
If you’re trying to get a business off the ground or you have a great idea for a product in mind, use your tax refund to help you pursue your dream. Make sure you plan out your business expenses carefully – many entrepreneurs make the mistake of going over budget way too fast. Get a financial advisor who can walk you through all the steps and make sure you’re covering your bases as far as tax-deductible expenses.
Make Smart Purchases
If you really want to splurge and get something for yourself, think of a product or service you can get that will help you cut down expenses elsewhere. For example, get a grill for the backyard and eat out less. You could also splurge on a nice coffee maker and stop making daily runs to Starbucks. If you live in a city or urban area, get a nice bike or motorized scooter and start spending less on gas.
Tax Refund Don’ts: What To Avoid
Some people are tempted to spend their tax refund on advanced mortgage or rent payments. This helps avoid late payment fees, but you’ll lull yourself into a false sense of security with your finances. Instead of paying monthly fees ahead of time, create a realistic monthly budget that you can stick to.
Another mistake that many people make is to spend their tax refund on an expensive item or trip they wouldn’t normally buy. While this may be okay if your finances are very stable and secure, most people should choose smarter spending options like those listed above. If you’re dying to treat yourself to a product or a trip, put aside around 5% of your refund as a jump-start for a savings funds, then add to it monthly until you can afford what you have in mind.
There are plenty of smart ways that you can spend your tax refund so that your finances are more stable. You’ll set yourself up for much more success in the long run by using these smart spending options rather than splurging on unnecessary purchases. If you’re not sure which of the options above are best for you, speak to a financial adviser before deciding how to spend your tax refund.