Over 40 million people received a tax refund this year, with the average refund totaling over $3,000. It’s all too easy to let that check burn a hole in your pocket and blow it on unnecessary purchases. And car dealerships, electronics stores and retailers take advantage of this time of year and offer special sales to tempt you into their doors.
But remember, this money isn’t a bonus. How you spend your tax refund could have significant impacts on your financial future if you make a good habit out of it. It’s money you earned throughout the year; getting a refund just means you overpaid in taxes in the first place. Remind yourself this is money you made working to prevent you from treating your refund like an extra gift. If you’re like many other Americans, a check from the IRS is a rare opportunity to change your financial situation in a meaningful and lasting way. Instead of running out and buying the latest gadget or toy, your tax refund can go a lot further to help you reach your financial goals if you plan carefully.
Here are ten ways to make the most of your 2015 refund:
- Reward Yourself, But Just a Little: Using all of the cash for practical things is smart, but it can make you feel deprived and disgruntled. Set aside a small portion, such as five to ten percent, for a splurge. Go out for a nice dinner or treat yourself to tickets to a concert. It will make you feel more relaxed and content with what you have, helping you focus on using the rest of the money thoughtfully and strategically.
- Pay Off Debt: Debt can hold you back from reaching your goals and can significantly drain your resources. If you’re carrying balances, particularly if you’re burdened with credit cards, car payments or lingering student loans, accelerate paying them off by using your refund towards the balance. If you have multiple debts, focus the extra payments on the one with the highest interest rate to save even more money in the long run. This approach is a simple way to get a high return on your investment.
- Build an Emergency Fund: According to a recent study, 62% of Americans have less than $1,000 in their savings account. An additional 20% doesn’t have a savings account at all. If you fit into either of these categories, you are living on the edge in a very dangerous way. Even a small emergency, like an unexpected car repair or medical bill, could wipe out your accounts, forcing you to rely on friends, family, credit cards or even worse, payday loans. Stashing your refund in an emergency fund can be a smart way to protect you and your family from financial disaster. Deposit your money into a separate savings account, and don’t touch it except for a real crisis. You’ll be amazed at the peace of mind financial security can give you.
- Cover Anything You’ve Been Putting Off: Like many people, you may have put off certain purchases, procedures or payments because money was tight. With your refund, you can take care of these things before they get any worse. Whether you need dental work or new work boots for your job, ensuring you have the essentials you need will help you stay productive and healthy.
- Buy Things That Will Save Money Later: If you are in control of your debt and have an established emergency fund, you may want to consider using your money on certain upgrades and repairs that will save you money over time. For instance, replacing old windows and adding new insulation to your home can help decrease your energy costs for years to come. Taking your car in for proper maintenance and preventative repairs can keep it running efficiently, eliminating the need for a new car payment later on.
- Invest in Yourself: Your refund could be a tool for increasing your income. After all, you are your biggest money-making asset. Use the extra funds to take a class to learn a new skill, attend an industry conference to build your network or purchase a membership to a professional organization to gain access to leaders in the community.
- Save For Retirement: If you’re behind on your retirement savings, your refund check can give you a much-needed boost. You can start funding a traditional or Roth IRA with your check, and then add to it each month to take advantage of compound interest. Depositing your refund each year can add up to hundreds of thousands of dollars in returns over time.
- Prepare for Your Child’s Education: If you have kids and plan on contributing to their college education, you can deposit your refund money into a 529 plan, a tax-advantaged savings plan specifically focused on future college or university expenses. Contributing to a 529 can also give you other tax benefits that can help you in later years at tax time.
- Start a Workout Plan: While this might not sound like a financial goal, your health is an important asset. Taking the time now to invest in proper nutrition and exercise can prevent issues from developing later on, like high blood pressure, diabetes or heart disease. Signing up at a local gym or taking a few sessions with a personal trainer can help you get fit and stay healthy.
- Make a Donation: When you’re on a tight budget, charitable contributions can quickly fall off your list of priorities. But if you’re in sound financial condition, a tax refund can be a great opportunity to contribute to a cause you support. You will get tax benefits for your donation, but more importantly, you’ll make an impact in your local community.
Whether your refund is in the thousands or is just a tiny windfall, put it to work for you rather than wasting it on more stuff. This extra money — which you earned in the first place — can help improve your financial situation and give you a solid foundation to build on for the future.