Tax Day is just a couple weeks away, so by now you’ve either already filed or are putting the finishing touches on your tax return and getting ready to submit it to the IRS. Even though this year’s average tax refund check is smaller than in past years, even a little bit of money is good news. 

Check out my top thee ideas for using your tax refund the right way.

So what’s the best way to use the extra cash from your tax refund? A windfall of a couple hundred dollars can go a long way toward building a more solid financial future. The idea here is to build some momentum that you can ride as you pay down your debt and/or build your savings for the rest of 2019.

1.  Pay Down Your Debt

Debt is like a weight that you have to lug around on your back. It slows you down and even makes it hard to breathe. Whether your personal ball and chain is a student loan or high-interest credit card debt, every single dollar that you can pay ahead of time means less interest to pay later. The more early payments you can make, the sooner you’ll be out from under your weight for good.

Throwing your whole tax refund at your debt could shave a couple months’ worth of payments off the end, saving you big bucks in interest in the long run. Even a small refund is like “free” money and will get your debt snowball or avalanche moving in the right direction. Send that big payment immediately and then go play with a debt calculatorto see how much money you’ve saved in interest — and how many months earlier you’ll be free of your burden.  

2. Start Saving

If your debt is manageable — or better yet, non-existent — you should put that refund into savings. Your first savings goal is an emergency fundthat you keep handy for the bad times: the car needs new brakes, you have a big hospital bill, or you’re out of work for a few months. Your refund is great seed money to get you toward the goal of having three to six months’ expenses socked away.

Another great savings option is a retirement fund. Even if you have a 401(k) with your employer, you can still open a personal IRA on your own. The beauty of the IRA is that it’s tax advantaged, so you can invest in mutual funds without paying capital gains taxes. 

Pro Tip: Roth IRAcan serve as your emergency fund andretirement account in one, because you can withdraw the money you contributed at any time without penalty — just make sure you don’t take out the interest the account has earned until you’re 59 and a half years old. 

3. Make a Smart Splurge

Personal finance is all about balance. You’ll never be able to reach your goals if doing so feels like a punishment. So if you really want to spend that tax refund, make sure you do it wisely. Splurging on a vacation may sound like a great idea, but it’s a pretty short-term event. When it’s over, it’s over.

On the other hand, consider what it would be like to spend the money on something that improves your life every single day. A new mattress, really comfortable shoes, or a warm winter coat are all items that you will have contact with for months, if not years, at a time. If you spend $1,000 on a week-long vacation, each day of happiness costs you $142.85. But if you spend $1,000 on a mattress that you sleep on every day for the next 10 years, each day of happiness costs just 27 cents. Choosing something that regularly improves your life can help you get the most bang for your buck.

The Bottom Line

No one likes doing their taxes, but your refund is like a little reward for getting the job done. If you use it wisely, you can turbo-charge your financial plan to make your future as bright as can be.


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