5 Smart Ways to Spend Your Tax Refund

Chances are high that you will get a tax refund this year after sending in your return. According to IRS statistics, 83 percent of people who file their taxes receive a refund of some kind every tax season. And who doesn’t love getting a check from the IRS in the mail? Receiving a tax refund is like a bonus: you have extra money to spend!

However, to ensure a healthy financial future, you shouldn’t be so quick to spend your refund. Spend your tax return in the right way, and you can better maximize it. Think of your refund as extra income, and you can reap even more financial benefits.

Here are five ways you can turn your tax refund into a smart investment.

1. Save It

One of the best ways to use your tax refund is to put it into a savings account. The benefits won’t be immediate, but you’ll thank yourself in the future. Deposit your tax refund into your savings account to increase its value. An average savings account will earn between 1% and 2% in interest annually – and if you have a high-interest savings account, you can earn between 5% and 10% on that little bonus from the IRS.

Don’t have a savings account? Tax season is an ideal time to open an account, as many banks offer promotions for new savings accounts with a tax refund deposit.

2. Invest It

Instead of letting the funds from your tax return sit in a bank account earning little interest, investing your tax refund can substantially increase the amount. Whether you’re an experienced investor or want to start building up a small portfolio, you can increase your investments with your tax refund. A good investment choice can compound the value of your tax return in the long run.

Consult a professional investment adviser if you don’t have the experience and knowledge necessary for recognizing good investments. This will ensure you make the absolute best investment for your refund and make more money. As long as you do your due diligence before buying an investment, you will earn substantial interest in the long run.

3. Pay Off Debt

Being crippled with debt is both emotionally and financially frustrating – and your tax refund can lighten that load. When you receive your tax refund, you can use the money to pay down some of your debt. Although a tax refund might not offer enough cash to completely pay off your debts, giving your tax return to your creditors will get you a step closer to financial freedom.

To make the biggest impact, you should make sure you use your refund to pay down your most expensive debts first. Look at your loan contracts to find the highest interest rates and prepayment penalties. Paying off even a bit of debt with your tax refund will increase your flexibility.

4. Prepare for College

College tuition costs are rising every year, and it’s more important than ever to have significant savings if you or your children are planning to earn a degree. Instead of borrowing money and racking up debt, you can start (or add to) a college fund. Save your tax refund in a designated college savings fund, your money can appreciate without extra taxes on interest earnings. Saving your tax return for college expenses can, therefore, be a good option for parents or adults looking to head to school.

5. Buy Necessities

Saving money for investments or the future can be the right option for people who are financially stable, but your circumstances may require you to focus on buying necessities today. Dedicate your tax refund to the necessities you need to live a more stable or consistent daily life.

For example, use the money to fix your car so you can get to work on a reliable basis – this “investment” will yield a huge return on investment. Or, dedicate the money to home repairs you’ve been putting off. Buying necessities such as these will improve your future and are a good decision.

Featured Tip

Want to save more money? According to SuperMoney, 2 millions Americans manage to live off a budget of just $60 a month.