When I was young and carefree, I couldn’t wait to file my taxes just so I could have extra cash to spend on clothes, bags, and shoes. Even though I was a little bit smart enough to put aside one-third of my income tax refund, I wish someone told me sooner there were other, smarter things to do with my income tax refund than blowing it on material things that I didn’t need any more of. Hopefully, this list of Top 5 Smart Things You Should do with Your Income Tax Refund will help you out. It’s better late than never, right?
1. Pay off credit card debt
While in college I racked up a large amount of credit card debt, let’s say around $5,000. Of course, I made payments, but after a while, I felt like I was stealing from myself by buying things on credit with the money I did not have. It makes no sense. The minimum payment you make on your credit card over time can double or even triple the cost of items you purchase on credit, especially if the interest rate is 15% or higher.
2. Start or build an emergency fund
It’s always good to have some “rainy day” money for those unexpected expenses, especially if you or your spouse loses their job, become disabled, or if your car suddenly stops working. Your emergency fund should comprise at least 3-6 months of all of your fixed expenses, such as mortgage/rent, utilities, food, transportation, etc.
Bankrate’s Emergency Fund Worksheet – Bankrate.com
3. College Savings
Begin college savings account for your child. Currently, I have an automatic savings plan setup through Capital One 360 that takes out money from my check whenever I get paid. Even when I was saving and cutting back on expenses, I still put money into my child’s savings account. Of course, there’s always the 529 Plan; however, one downside to the 529 College Savings Plan is that you risk income tax and a 10% penalty on the account earnings if you take out 529 money for a purpose other than college. What if your child doesn’t want to go to college?
4. Put a down payment on a home or do a renovation
One thing I did with my tax refund from prior years was to save it for my future home. Coming up with a down payment to purchase a home is a hard task, but not impossible, and your tax refund can help add to what you’ve already had saved for it. And if you’re already a homeowner, you can use your income tax refund to fund a renovation or upgrade some appliances in your home. Renovations add equity, especially if it’s a kitchen or bathroom renovation, so you’re basically paying yourself back.
5. Prepay a vacation
Instead of using your credit card to finance your vacation, which will have you paying for it months or even years after you’ve enjoyed your fun in the sun, set aside some money from your income tax refund for a vacation. One thing my husband and I decided to do is set up a vacation fund where we’d have a separate account to set aside money monthly or bi-weekly specifically for a trip we want to go on.
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What are your plans for your income tax refund?