Top 10 Uses for Your Tax Refund

Each year tax season rolls around there are those who dread it because they expect to owe money and those who celebrate because they will receive a tax refund. Tax refunds can feel like a windfall. Suddenly you have a bonus, which really is an interest free loan you gave the government because you overpaid your taxes.

Many families like having a refund each year because it provides a windfall that can be used to take care of various expenses or provide a vehicle for saving. Spending or saving your refund with purpose can help to advance your financial goals.

Here Are 10 Ways to Make Your Tax Refund Work for You:

Build or add to an emergency fund: Having an emergency fund in place can help cover unexpected expenses that pop up over the course of the year. This might include car or home repairs, health insurance bills, or other expenses you are unable to plan for. An emergency fund should not be used for expense you know are coming like paying for a vacation or intermittent bills that come around quarterly or annually. With an emergency fund in place you will enjoy greater financial security and reduce the times when you must charge unexpected expenses on high interest rate credit cards.

Increase retirement savings: If you have struggled to put away funds throughout the course of the year, a tax refund can be used to contribute to an IRA. Typically, a 401(k) only accepts contributions until December 31. IRAs accept contributions until the tax filing date, which is generally April 15th in the year you file. Contributing to a traditional IRA might reduce your tax liability and increase your refund. Roth IRA contributions do not provide an immediate tax benefit, but allows for tax-free growth and withdrawal at retirement. Either of these strategies will improve your long-term financial health and could provide an immediate benefit.

Start or build a college fund for your children: The cost of college has continued to rise well beyond the rate of inflation, making it more difficult for middle class families to pay for college. The average cost of college in 2015-16 is over $30,000. Multiply this by a four-year degree and you must find over $100,000 if your child were starting school this year. Over time those costs are expected to rise even further. For those with a college fund in place you receive preferred tax treatment and your children may be able to avoid the trap of graduating with high levels of student loans that will take decades to pay off.

Pay off high interest rate credit card balance: One of the most effective uses for tax refund is eliminating double-digit debt. Whether you are reducing the balance or completely paying a credit card off this strategy can increase monthly cash flow, along with saving thousands of dollars in interest charges. When minimum payments are only 2% to 3% of credit card balances, it can take decades to pay off credit card debt. Tax refunds can jumpstart a debt elimination strategy.

Negotiate with debt collectors: Getting behind on credit card bills is expensive and stressful. Bill collectors start calling, and the debt balance can double from late fees and default interest. Using a tax refund to leverage a debt payoff on one or more credit card accounts can lead to the elimination of collection calls and paying significantly less than the stated balance. If debt removal from your credit file is part of the negotiations, you may be able to improve your credit score at the same time. At this time of year debt collection agencies are open to making payoff arrangements that will put the debt to rest for both you and the creditor.


Prepay interim bills: Creating a monthly budget has a weakness in that non-monthly payments can be difficult to account for. It takes discipline to save for these bills. If when the bill comes due, if the money was spent on other unexpected expenses, you may find intermittent bills being paid with a credit card instead of from your checking account. To solve this problem and save money, pay these bills with a tax refund. You will save the statement fee or interest charges and not have to worry about the bill again until next year.

Prepay for your vacation: Accrual of credit card debt often occurs when you pay for vacations, family travel, and other annual events. Booking hotels or vacation homes early in the season will save you money and give you the best pick as far as value and location. You will also have more time to look for bargains and find discounts. While this strategy will not pay off existing debt, it has the ability to prevent additional debt from being incurred throughout the year.

Home improvement or home maintenance: Owning a home costs more than your mortgage payment. You must fix things that break and wear out and upgrade to maintain the home’s value. It is recommended that you spend approximately 1% of the home’s value for maintenance and home improvements to adequately maintain its value. Whether you are replacing worn out appliances, a leaky roof, or an HVAC system, home improvements can increase your home’s value, save money over time, and reduce energy bills. You will also have the home in good condition should you need to sell.

Pay for something you have been putting off: When money is tight and you have bills piled up you often put off things you either want or need. This might include a number of practical things like vehicle repairs or dental work. Paying for things that are long overdue, can improve your quality of life without taking on more debt. Unfortunately, most health insurance does not cover things like dental care, hearing or eye glasses and contacts. Even with insurance, families may be putting off a needed surgery because of high out of pocket costs.

Splurge on something fun: While the practical side may demand hundred percent of the tax refund to be used for needs such as healthcare and debt reduction, treating yourself with a small percentage of the money can help keep you motivated to live on a stricter budget the rest of the year. With 5% of your tax refund, buy something you have wanted but not been able to save for.

Tax refunds, when used wisely, can help start your year off right. They can give you a jumpstart on the financial goals you have set for yourself, and otherwise improve your financial situation. You are spending money you have earned, so spend it wisely.

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