Smart Ways to Use Your Tax Refund'

(Image by Eliane, Flickr)

It’s tempting to think of your tax refund as splurge money, but the fact is, those funds have technically been on loan to the U.S. government for the last year. Get ahead financially by making wise moves with the money.

Consider these smart alternatives to using your hard-earned refund.

1. Build an Emergency Fund

When it comes to financial fitness, socking money into a rainy day fund is often your first step. Without money to fall back on in the event of life’s inevitable financial twists and turns, you risk getting behind in your bills or being unable to pay for something serious like medical expenses. If you don’t have an emergency fund, deposit your tax return into a high-interest savings account and breathe a sigh of relief.

2. Pay Down Debt

If you have a lingering credit card balance, paying it down or off is a smart investment in your financial future. Besides saving the monthly interest charge, you reward yourself with the peace of mind that comes with lowering your overall debt.

3. Invest in Home Maintenance

Not addressing household maintenance tasks such as fixing plumbing leaks, cleaning dirty chimneys and unclogging drier vents can cost you a lot more if you let them linger, and some situations can be dangerous for you and your family. Protect yourself and your real estate assets by using your refund to take care of neglected home repairs.

4. Bolster your Retirement Savings

Once you receive your tax return it will be too late to contribute for 2011, but you can sock the money away as an IRA contribution for 2012. Contribute up to $5,000 per year, or $6,000 if you are age 50 and older.

5. Fund College Savings

If you haven’t started a college fund for the kids, or if you feel like you haven’t saved enough, your refund gives you a chance to make an investment in education. Contribute to a 529 education savings plan and you can use the money tax-free when college costs hit. You may also be able to get an income tax deduction for your contribution.

6. Be a Humanitarian

Your tax refund gives you a chance to make charitable contributions that your budget doesn’t generally allow. Giving back monetarily feels good, and it’s tax deductible when you file in 2013.

7. Start a Business

If you have entrepreneurial instincts but lack funding, your tax return may be just the seed money you need to get started as your own boss. A successful business can earn you extra income, and the expenses you incur doing business are tax deductible.

8. Open a Dream Fund

If the idea of spending or investing your tax refund on something practical sounds boring, open a high-interest savings account with the money and call it your dream fund. Make a list of your financial “someday” goals and estimate how much each will cost. Then consider this the first deposit towards fulfilling your dreams.

If you’re getting a refund this year, what do you plan to do with it?

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Published April 13, 2012 Updated: December 27, 2012
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