Ten Things to Do With Your Tax Refund

Written by Nickel - 12 Comments

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With Tax Day officially behind us, I thought I’d put together a list of things to do with your tax refund. Remember… Your tax refund isn’t some sort of magical windfall — it’s your money, and you worked hard for it. Do something smart with it.

1. Start an emergency fund. If you don’t have an emergency fund, consider opening a high-yield savings account and depositing your windfall for a rainy day. While it might not be enough to create a full-fledged emergency fund, it’ll be a good start. And if you already have an emergency fund, consider adding to it.

2. Pay down your debt. Whether it’s credit cards, an auto loan, or a student loan, you need to get that monkey of your back. So add your windfall to your debt snowball and keep on digging.

3. Invest in yourself. Use the money to cover tuition for a course about something that interests you, or which increases your earning potential.

4. Prepay your mortgage. Send your windfall to your mortgage lender. You’ll realize savings over the life of your loan, and you’ll own your house outright sooner than expected.

5. Refinance your mortgage. While refinancing your mortgage to a lower rate can result in substantial savings, you typically need to bring some cash to the table. In this case, your tax windfall could be just what the doctor ordered.

6. Fund your IRA. Did you know that you can have the IRS direct deposit your refund into your Roth, Traditional, or SEP-IRA? While it’s too late to arrange for that this year, it’s never too late to write a check to your IRA custodian when your refund arrives.

7. Invest in your children. Start a college fund for your kids. Whether it’s an Education Savings Account (ESA) or a 529 plan, there’s no time better than the present to get started.

8. Support your favorite charity. Not only does making a charitable donation help a worthy cause, it’s also deductible on next year’s taxes.

9. Add it to you “sunny day” fund. While emergency funds are all well and good, everyone needs a bit of fun and games every now and then. Why not set some aside for a future vacation or some other special expenditure?

10. Adjust your withholding. Last but certainly not least, you should consider adjusting your withholding so you don’t end up giving the government an interest free loan during the upcoming year.

If you have any other suggestions, please feel free to share them in the comments.

Published on April 17th, 2008 - 12 Comments
Filed under: Education, Taxes
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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12 Responses to “Ten Things to Do With Your Tax Refund”

  1. 1
    Zachary Spencer Says:
    April 17th, 2008 at 8:09 am

    I’m surprised that out of the 10 you’ve suggested, only 4 out of the 6 are directly related to long term investing.

    Well, I suppose paying down debt can be considered “investing” too.

    I personally used some of mine to open a lendingclub.com lending account. It’s a very interesting idea and allows me to “Give back” by loaning money to people who wish to consolidate their debt. Of course, the higher interest rate is nice too :) .

  2. 2
    Ria Rhodes Says:
    April 17th, 2008 at 10:59 am

    You could go the “do good, feel good” route by giving to entrepreneurs-in-need here: http://www.kiva.org/

  3. 3
    KC Says:
    April 17th, 2008 at 11:09 am

    I’m not really getting a refund, but I am getting a few thousand back since I overpayed on my quarterly estimates. That money will form the basis of my Roth contribution. Couple it with the money the guvmint is giving us as an early rebate on next year’s taxes and I’ve pretty much got my Roth contribution. Guess I’ll have to dip into savings to get my husband’s Roth contribution for this year.

  4. 4
    Frugal Dad Says:
    April 17th, 2008 at 11:09 am

    I appreciated #9 – Add it to you “sunny day” fund. Sometimes we get so busy trying to save every last dime, or payoff debt, that we forget to stop and smell the roses. Great advice to start a little “sunny day” fund.

  5. 5
    Will Says:
    April 17th, 2008 at 12:11 pm

    Excellent list of possible uses for a tax refund. I wanted to comment specifically on the emergency fund option. A lot of people don’t get one started because they believe they have to open it with a large amount. Well a tax refund check is an excellent start. And by the way, if you could throw in the stimulus tax rebate check, it would work wonders.

    I recently wrote a post about “10 ways to jumpstart your emergency fund”. Among the options: using your tax rebate and/or refund, adjust your withholdings, and so on.

  6. 6
    Emily Says:
    April 17th, 2008 at 2:39 pm

    What you talking about Refund. I ain’t getting no refund. I owe the government 2 Gs. Good thing I saved for it all year.

  7. 7
    Curt at PennyJobs.com Says:
    April 17th, 2008 at 2:49 pm

    #11. Invest it in gold. GLD on NYSE.

  8. 8
    SomeGuy Says:
    April 17th, 2008 at 6:07 pm

    Wish we were getting a refund. Writing $10K worth of checks is really depressing and our April net worth will be taking a hit. I’m considering next year having the tax savings fund be excluded from net worth reports to avoid this. Nickel or anyone else — how do you handle?

  9. 9
    SavetotheFuture Says:
    April 18th, 2008 at 9:26 am

    I like the use of the word “sunny day fund”. Thankfully, my finances are in good shape (No debt,e-fund full,and funding for retirement).
    I’m using the money to go towards my upcoming wedding.

  10. 10
    Kyle Says:
    April 18th, 2008 at 11:54 am

    11. Blow it in Vegas. Come on guy, gotta be patriotic by getting out there and stimulating the economy!

  11. 11
    Elizabeth Says:
    April 23rd, 2008 at 12:55 am

    Am I the only PF blogger who’s excited about earning a quick and dirty 10% on my “stimulus” check by cashing in on Kroger’s “free grocery” offer?

    Turn in a $300 check and you’ll get a $330 gift card; a $600 check will net you a $660 card; and a $1,200 check will get you $1,320 in grocery cards. No alcohol or tobacco and nothing from the pharmacy but that doesn’t seem like a big deal to me.

    The best part is, unlike Kmart’s deal, you don’t actually have to take in your stimulus check. You can pay in cash, personal check, or credit card. So put your stimulus check to use twice — once to get a quick 10% return and another to pay down your credit cards or fatten your emergency fund.

  12. 12
    Anna Says:
    February 12th, 2009 at 2:51 pm

    I agree with all of your ideas except for #4-pre-pay your mortgage. I definitely believe in paying off your mortgage early but you need to put the money in a separate account until you have enough to pay off the remaining balance of your mortgage. The reason for this is simple. It gives you the control and not the mortgage company. If you lose your job this separate account will enable you to continue to pay your mortgage payments for a long time(hopefully). If you pre-pay, the bank can forclose on you if you can no longer pay the payments. We paid off our home in a little over 10 years so now the only thing we have to worry about is property tax.

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