It’s that time of year again! While experts agree you should avoid getting a large tax refund (which is essentially an interest-free loan to Uncle Sam), it’s hard not to feel giddy when you know extra money is coming your way. Many people look forward to getting a refund each year and use it as an excuse to splurge on themselves.
Before you buy that new TV, however, it’s important to take a close look at your finances and determine if that’s really the best idea. While putting that money toward a more practical purpose may not be as much fun, it can pay off in the long run.
Here are a few smart ways you can use your tax refund:
- Pay off debt. This is a no-brainer. If you’re carrying around credit card or other high-interest debt, you want to get rid of it as quickly as possible. Before that cash has a chance to get comfortable in your bank account, use it to pay down your debt and lessen some of the anxiety hanging over your head.
- Put it in savings. It never hurts to pad your savings. This could be the year that your hot water heater breaks down or your car decides to bite the dust. Set that money aside in a high-yield savings account so it’s there when you need it.
- Prepay your mortgage. Your home is probably your biggest investment—and your mortgage payment is probably your biggest debt. Putting a little extra toward your mortgage regularly can save you thousands of dollars and shave years off your loan.
- Fund your retirement. You don’t have any debt. You have a fully funded emergency fund. Does that mean you’re free to book that plane ticket to Cancun? Not necessarily. How are your retirement accounts doing? If you’re behind on your retirement savings, it’s not too late to catch up.
- Invest in yourself. It’s easy to let your career get stuck in a rut. Your tax refund can help you make a career change or take your skills to the next level. Use it to enroll in continuing education courses or certification programs and earn that promotion you’ve been waiting for.
- Upgrade your life. Sometimes you simply need to make a major purchase. If you’re a freelance writer and your computer is slow as molasses, you probably need a new one so your business doesn’t suffer. If your energy bill is sky-high and you live in an older house, it might be a good idea to replace your windows. Making smart purchases now can save you a lot of money down the road.
Whatever you do with your extra cash, make sure you keep track of it. The last thing you want to do is slowly spend it on a frozen treat here or a pack of gum there, only to discover it’s gone before you know it. You should regularly monitor your banking statements and other financial documents to ensure you know where your money is going. Don’t forget to store these and all your other important documents on InsureYouKnow.org. It’s part of being a knowledgeable, financially responsible consumer.