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How to Spend Your Tax Refund
If you got a tax refund this year – or if you had any other sort of financial windfall – you can choose to spend it in many different ways. For example, you could take a vacation or buy that big-screen TV you have had your eye on.
But there are some other ways you could spend that money that would have a more permanent effect on improving your long-term financial situation:
Set up or add to an emergency fund. What would happen if you suddenly lost your job, needed to make major home repairs or faced unexpected medical bills? Would you have the money you need, or would you have to resort to credit? Most experts believe you should have money to cover at least three to six months of expenses; that money should be in a savings account, money market or other easily accessible account. If you don’t have an emergency fund, use your tax refund to start one. If you have one but need to add more money, use your tax refund for that.
Pay off high-interest debt such as credit cards. Although interest rates on CDs and other savings vehicles are extremely low, many credit cards are still charging interest well into the double digits. Pay off the card with the highest interest rate first, then move on to the next.
Add to your retirement account. Start with tax-advantaged accounts such as a 401(k) or IRA. Consider whether a Roth IRA would be a good choice for you.
Contribute to a tax-advantaged college savings plan for your children or grandchildren.
Make an extra payment on your mortgage or your college loan. This will reduce your principal and ultimately save you money by speeding up your payoff.
Put some money into your house. The real estate market is starting to pick up, and people who have been sitting on the sidelines for years are starting to put their homes on the market. If you are thinking of selling – or even if you just want to make your house more comfortable or attractive -- use your refund to make changes, from repainting to a new kitchen.
Add your refund to a down payment on a house. Mortgage rates are still at historic lows, and home prices are only starting to recover from the recession. So if you are thinking of buying a house, this might be a good time.
Buy something you need but have not been able to afford, such as a new coat or a new car.
Go back to school. You can finish your degree, get an advanced degree or learn a new skill for a new job. Or you can just take some classes to expand your mind.
Start a business. If you have an entrepreneurial dream, you can use your refund as seed money. If it is not enough right now, save it and add to it any extra money you can. Who knows – maybe next year’s refund will put you over the top and on your way.