We all know that eating our vegetables before dessert is a good idea. But just the same, few people would advocate only eating vegetables — you have to live a little, after all!
The same principle applies to your tax refund, that one-year, interest-free loan the government appreciates so much. It can be tempting to take that “windfall” and splurge on something you wouldn’t buy any other time. And I’m not saying you shouldn’t do that. But, here are five ways you might consider using at least a portion of that tax refund, so you’re getting a healthy, balanced mix that includes a little fun too.
Pay off high-interest debt
There are no guarantees when it comes to your finances, but perhaps the closest thing is paying down or paying off high interest debt. High-interest debt steals from you and your future financial independence. Many credit cards carry rates of 15% or more on unpaid balances (ouch!) When it comes to investing money, compound interest is an amazing principle, but when you owe money at high interest, it’s amazing how well it works against you.
Replenish your emergency fund
Your emergency fund is one of the most important stashes of money you have — life is uncertain. If the air conditioner on your house quits or the transmission goes out in your car, you need to have a solution that doesn’t involve raiding any of your long-term savings and investments. A good rule of thumb is to have 3-6 months of living expenses stashed away in your emergency fund. If you’re not quite there yet, your tax refund is a perfect opportunity to pad your emergency savings account.
Hike up your retirement savings
Particularly in a Roth IRA. When you earn income, it may be subject to tax. If you choose to place dollars into a Roth IRA, it will usually be after you have paid income tax, which is generally a good decision. An even better decision is to take part of your tax refund and invest those dollars in a Roth IRA, getting you closer to maximizing your yearly contributions. As long as your Roth IRA is five years old, qualified distributions of contributions and earnings won’t be taxed.
Take care of that home improvement project you’ve been putting off
Keeping your home well-maintained and updated can be a solid investment. You may not be able to re-do your entire kitchen, but there are many projects you can do that may increase the value of your home, and might even save you some money. For example, investing in a programmable thermostat that may save you on energy costs, upgrading to more modern and energy-efficient appliances, or simply adding a fresh coat of paint. Fresh paint can do wonders to freshen up your house whether you’re looking to sell or just need a new look!
‘Invest’ in an experience
A tax refund isn’t really a windfall, but it does represent a chunk of ‘saved’ money — even if it was at the expense of an interest-free government loan. After you eat your vegetables, (i.e. take some of your refund to pay off high-interest debt, replenish your emergency fund and hike up your retirement savings) if there’s any left, use it to pre-pay for a vacation or other experience for your family.
No matter how you decide to use your tax refund, it’s probably a good idea to have a plan. We all know what happens when we add a chunk of money to our bank account without a plan!