Tax refunds are sort of a forced savings account for many people. While it makes sense to adjust witholdings to minize a tax refund, there are a number of useful things to do with one besides blow it on a new television.
Smart Things to Do With a Tax Refund
1. Pay off high-interest credit-card debt. Eliminating credit card debt is one of the smartest ways to spend any windfall. The higher the interest rate on your debt, the bigger the payoff. Think about it; where else can you get a guaranteed return of 22% on your money?
2. Rebuild your emergency fund. Thanks to unemployment, underwater mortgages, and a general economic funk, many households have had to turn to emergency funds to weather the storm. It makes sense to allocate some or all of your tax refund towards covering future emergencies.
3. Create your own “car insurance savings account.” If you currently have a $250 or $500 deductible on your car insurance policy, consider raising it to $1,000 and parking $1,000 of your tax refund in a dedicated savings account. You’ll enjoy a permanent way to save money on car insurance premiums, and earn a little interest on your savings account.
4. Boost your retirement savings. If your debts are paid, and you have plenty of money saved for emergencies, the next biggest bang for your refund buck is to invest in your retirement. Maybe that means funding a Roth IRA, if you are eligible. If not, drop the money in a savings account, increase contributions from your paycheck to your 401k plan, and use the savings to offset the difference.
5. Purchase a gym membership. Many gyms offer significant breaks for those that opt to pay one year in advance. My gym offered two free months and waived the registration fee if I agreed to pay for the full year, effectively shaving $90 off my annual gym costs. Be sure to check out the gym’s refund/cancellation policy before agreeing to such a long commitment.
6. Invest in a DRIP. Consider dropping some money in a dividend reinvestment plan, or DRIP, or using a low-fee broker such as ShareBuilder or ScottTrade to start a position in a company with a long track record of increasing dividends.
7. Build your college savings. It’s tough to carve out retirement savings, college savings, and put a roof over your family’s head and food on the table. After all, there are only so many dollars to go around. Boost your kids’ college savings by opening a 529 college savings plan (here’s a look at the best 529 plans).
8. Help your kid save for the future. If you are the parent of a teenager that earns an income, did you know you can help them open a Roth IRA? No kidding. The only requirement is that your teen files a tax return. He or she can invest in a Roth IRA up to their earnings, or the maximum yearly contribution, whichever is smaller. So, if your daughter earned $1,800 last year babysitting, kept meticulous records and files a tax return, you could gift her $1,800 to invest in a Roth IRA. She’ll be well on her way to becoming a millionaire.
9. Start a side hustle. Ah, the infamous side hustle. Many of the world’s most successful entrepreneurial efforts were started on less than $1,000 (I started Frugal Dad on less than $50!). Use your tax refund to seed a business you’ve always dreamed of running.
10. Invest in a home improvement project. Lean towards projects that improve your home’s efficiency long term. Consider installing a programmable thermostat, or a hot water heater insulating cover.
11. Open a “Car Replacement Fund.” Let’s face it; the car you are driving now will eventually die. Why not divert a little tax refund money to start a car replacement fund. If your current car is paid for, save what amounts to be a car payment in this account and when the time comes you can pay cash for your next car.
12. Build a square foot garden in your backyard. Use a couple hundred dollars of your tax refund to purchase gardening supplies, soil, and seeds. Now’s a great time to plant, and soon you’ll be enjoying tomatoes right off the vine, instead of those shipped across the country in your grocer’s produce section.
13. Give it away. If you’ve been considering giving money to a charity, now is a great time. Donating your tax refund to a worthy cause can even help on next year’s taxes, as most charitable contributions are tax deductible. With a down economy, and recent large scale disasters such as the tsunami in Japan, relief organizations could use the help.
14. Pay extra on your mortgage balance. We personally plan to pay off our mortgage early. Why? Because we value the freedom a debt-free lifestyle affords. Some will argue that we are missing a tax break (you know, getting to deduct $3,000 from our income for sending $10,000 to the bank in mortgage payments), but living mortgage-debt free provides a lot of options.
15. Get your will done. My wife and I recently updated our wills after a death in the family. Identifying guardians for your children, and disposition of your stuff in the event of your death is not fun, but it is absolutely necessary. If you have kids and do not have a will, stop everything, financially, until you have enough saved to visit an attorney and have one drawn up. It is that important.
16. Take a class. It doesn’t have to be an academic class, but it could be. Maybe you’d like to learn more about cooking, or self-defense, or real estate. Investing a little tax refund money in yourself can go a long way.
17. Go on a “paid-for” vacation. My family recently enjoyed our first cash vacation, and it was awesome! I didn’t have any bills to dread on the ride back home.
18. Hire a chef for the week. No, not so you can experience the life of the rich and famous. Hire a chef to cook in your home for one week and teach you various ways to cook healthy meals for your family. When the week is up, apply the new techniques and ingredients to make meals for your own family.
19. Plant a tree, or two. Not only will planting a tree add value to your property’s curb appeal, but in a few years the shade will help lower utility costs in the summer.
20. Create a checking account buffer. Leave the refund in your checking account, but pretend your account is really zero. For example, if your refund is $500, leave that money in your checking account, but do not include it your register balance. The extra buffer will help you avoid fees associated with going below zero.