A lot of people will tell you that you’re foolish to get a tax refund. They’ll tell you that you’re giving Uncle Sam an interest-free loan. They’ll tell you that you should change your tax witholding so that you can have that money in your pocket all year round.
It sounds logical, but for many of us, it isn’t practical. When that money is in our checking account, we’re more likely to spend it instead of saving it, so sometimes getting that tax refund is a kind of forced savings for us. Sure, we don’t make interest on that money, but we haven’t tossed it away on take-out and fancy shoes.
If you’re getting an income tax refund, here are some smart things you can do with that money:
Pay down debt. If you have credit card debt, student loans, or car loans, put your income tax refund towards cutting down this debt.
Establish (or boost) your emergency fund. You should start with at least a $1,000 emergency fund. Once you’ve got that, work on setting aside 3 to 6 months of living expenses in an emergency fund.
Fund your retirement. Consider putting the money into a Roth IRA or other retirement fund. The money you put in now will continue to make money for you long into the future.
Invest in education. If you’ve been meaning to go back to school to increase your earning potential, consider using your refund to help pay for that additional training. If you’re already on track for your retirement savings, don’t have any debt, and have an emergency fund, then consider putting money in your kids’ college fund.
Make necessary home repairs. Staying on top of home maintenance projects such as fixing rain gutters, repairing or replacing a roof, or painting your house, can prevent costly emergency repairs later on.
Consider energy-efficiency. You can use your tax refund to invest in things that will improve the energy efficiency of your home, which will help you save money on your utility bills. Insulate an attic, replace old windows or aging, electricity-sucking appliances. Convert your light bulbs to compact flourescents or plant some shade trees. You may also discover that these moves maybe be eligible for rebates from your local utility company or federal tax credits.
Start a vegetable garden. If you have the room, consider using some of your refund money to start a vegetable garden. If you don’t have a lot of room, square foot gardening or container gardening may also be an option. Growing your own vegetables can really help you save on your food bill, and eating all those vegetables can help you stay healthy too.
The key thing to remember when trying to decide what to do with your tax refund is to remember that your decision doesn’t have to be all or nothing. You can put some of the money towards debt and some toward your emergency fund. You can fix something in your home and start a garden.
And remember to pull out a little bit of that money for something fun, too. Perhaps a dinner out or an overnight stay somewhere may be just the ticket to recharge you as you work on your financial goals.
Note: This post contains affiliate links that helps support this site at no cost to you. Please see our full disclosure policy for more information.