So you filed your tax return and got news that a tax refund will hit your bank account in the next few weeks. Naturally, your next question is: “What Should I Do With a Tax Refund?”
1. Reduce your credit card debt.
You probably wouldn’t pay someone 15% (the average credit card interest rate for existing accounts) to borrow money you already have — but that’s exactly what you’re be doing if you carry a balance on a credit card, and don’t use your tax refund to pay it down.
2. Stop living paycheck to paycheck
If you don’t have at least three months worth of your income saved in an emergency fund, put your tax refund in an interest bearing savings account now. (Ideally, you’ll keep on saving until you have at least six months worth of your monthly take home pay saved). Look for an account that pays a decent amount of interest on your cash (Bankrate keeps lists the highest online savings rates here). In addition to rate, make sure the account doesn’t charge fees for services like transfers, and doesn’t require a minimum balance. You won’t get rich from the interest you earn— but you will get paid a little bit for saving. But most importantly, you’ll start saving. Once you do start, don’t touch the cash unless you have a true emergency.
3. Give your future self an out.
Even if you love your job and never plan to retire, or are a self-described FIRE devotee, you’ll get benefits from using your tax refund to beef up a retirement account balance. For starters, your investment grows in the account without immediate tax consequence, and your contribution could mean more tax savings next year (based on your income, age and contribution limits that apply to your specific situation).
4. Pay down student loans.
Any additional amount you put towards lingering student loan debt will help it disappear faster, and will cost you less in the long run.
5. Set a financial goal and work towards it.
Want a new car? A summer vacation? New couch? Great. You can use your tax refund to pay for some of it. But don’t pull the trigger until you’ve saved enough money to pay for the whole thing in full. Figure out exactly how much you need to save in full, and use part of your tax refund to start saving. Then, keep on contributing little by little until you save the full amount you need. Just like going to the gym or eating healthier or any behavior you want to change takes consistency until it sticks, so does learning to budget and save for what you want. It may not be your gut instinct to start, but the more you practice, the more intuitive it becomes.