Wondering what to do with your tax refund? First of all, resist all urge to frivolously spend it on small purchases you don’t need. A Nordstrom’s shopping spree won’t help you pay off your bills or retire. And that large TV you’ve been coveting? Don’t even consider it unless you’re completely debt free. A good rule of thumb: If you couldn’t afford it before your refund, you shouldn’t be buying it now.
Instead, treat your tax refund, and any large bonus for that matter, as an investment opportunity. That doesn’t mean you can’t spend a dime. In fact many experts recommend spending a small percentage of it to help you stay motivated to save. Go for a small splurge—somewhere in between a new toothbrush and a new motorcycle. Then, do something smart with the remainder of your cash—something with a long term benefit.
5 Smart Ways to Use Your Tax Refund
1. Pay off credit card debt
If you have credit card debt, paying it off should be your first priority. The interest rates on credit cards could be costing you hundreds. Plus, your credit utilization impacts your FICO® Score so it’s important to keep your balances below 50% of your credit limit. Read this pay off guide at CompareCards.com, and use our payoff calculator to come up with a payoff plan.
2. Upgrade an expensive, low efficiency appliance
Even if you’re feeling confident in your net worth, high monthly expenses can take a toll on your overall financial health. Consider auditing the appliances in your home and using your tax refund to upgrade any energy suckers. You’d be surprised how much this could help your monthly bills.
3. Upgrade your health, home, life or car insurance
If you opted for the bare minimum on any insurance plan, consider reevaluating your needs. Don’t go for premium coverage if you don’t need it, but make sure you’ve got all the coverage you need. Things like a rental car or dental procedures can be a costly surprise expense.
4. Invest in your health
1 in 3 Americans have reported having difficulty paying off their medical debt—as a result of both large and small bills. Consider good health a savings investment and use your tax refund to purchase a diet plan, physical trainer, vitamin supplements or even a new blender. Take this as an opportunity to kick start lifelong health. Ask The Money Coach gives advice on health-eating on a budget.
5. Put it into a savings account
The obvious choice is to put your tax refund into a savings account. Experts recommend having at least an emergency account and a retirement account—putting your tax refund into either would be beneficial. It’s not as glamorous or fun as some of your other options, but it’s worth it in the long run. First calculate whether you’d be better off putting your money into savings or paying off debt.
Still feeling lost? Read more savings tips here, and tell us what you decide. How do you plan to spend your tax refund?
Kelsey Havens is a financial health enthusiast, consumer protection advocate and Content Manager at myFICO.