Too bad tax time is spending time for most people. They earmark the money for clothes, expensive dinners and vacations. Before you blow your tax refund (which is your hard-earned money to begin with), here are a few smart ways to allocate that dough.
Create an emergency fund.
You should have at least six months of expenses in a highly liquid vehicle, such as an online savings account or a money market account. An emergency fund can mean the difference between bad news dealing you a crushing blow or just being a bump in the road. Use your refund check to make a significant deposit in your “rainy day” account.
Pay off debt.
Put your refund to work by getting rid of some of your high-interest debt. Start with the highest interest rate debt and then work your way down. Usually this means starting with any credit cards or payday loans and moving towards auto loans, student loans, and mortgages.
If times are tough, donating to charity might have slipped through your fingers. When you get your refund, it’s your chance to give back to society. Besides, you can claim the tax deduction.
Of course I’m telling you to invest your refund. This is a personal finance site, after all. You can use it to contribute to your Roth IRA, a 529 college savings plan, or in an index fund. If you want to invest in individual stocks, you can do that too. Just make sure you’re conservative, diversified, and not getting ripped off in fees.
Use it as seed money.
Do you have a business idea that you’ve been wanting to start? Use your refund to get your business up and running. A quick infusion of cash might be all you need to transform your dream to a reality, and since you will have created a business, you’ll get small business tax deductions next year.
Make extra payments on your mortgage.
If you make just one additional payment per year on a 30-year mortgage, you can have your home paid off thirteen years early and save thousands in interest. This is a huge return on your investment.
Make your home more energy efficient.
You’ll have the cash – instead of buying a new television, get energy efficient appliances… as long as you do the math and know they’ll save you money at some point. Things like air sealing your home and replacing your lights with CFLs can significantly reduce your energy bill.
If you’ve been putting off getting a gym membership because of the cost, now is the time to do away with your excuses. If you don’t want a full-fledged gym membership, at least get a treadmill or bike to burn some calories at home.
Get gifts in advance.
Are you stressed during the holidays? Shocked when you get that huge credit card bill in January? It doesn’t have to be this way. Get your holiday gifts now so you don’t have to worry about it later. The same goes for birthday gifts and all holiday cards.
Buy a few books that will have a direct impact on your personal and professional life. Use your tax refund to take an educational course or attend a seminar on a topic you enjoy. You may be able to get a better job if you get a certain certification, which will pay dividends in the future.
Are you getting a tax refund? If so, what are you spending it on?