Home > Personal Finance > 4 Smart Things to Do With Your Tax Refund

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There’s a good chance you’re probably getting a refund from the federal government sometime soon, if you haven’t already (and if you aren’t among the thousands of people who experience delays because of taxpayer identity theft).

There are a few ways to look at that deposit. For one, you might be a little bitter when you realize how much you let the government borrow from you in the last year, interest-free. You might also be excited: No matter what the amount is, you can really improve your financial situation if you think carefully about how to use that money and execute your plan accordingly.

If you’re wondering what to do with your tax refund, here are some things to consider.

1. Boost Your Savings

Having an emergency fund is crucial to your long-term financial well-being. When an unexpected expense pops up, like a medical bill or urgent car repair, having an emergency fund can help you avoid going into credit card debt or ending up with a collection account on your credit report. Both those things can really drag down your credit scores. (You can see two of your credit scores for free every 30 days on Credit.com.)

Many financial experts recommend you keep 3 to 6 months’ worth of income in an emergency fund, but no matter where you’re at with that, it’s really important to have some money stashed away. A tax refund is a great way to get started.

2. Adjust Your Withholding

One of the smartest things you could do with your refund is use it as a piece of information to improve your financial strategy going forward. If you have a massive refund, you might want to adjust your withholding for next year so you have more income at your disposal on a regular basis. Conversely, if you just barely got a refund or think your tax liability might go up next year, you might want to think about how you could maximize your refund in the future. Once tax season has died down, you could consult a tax professional about what you might want to change for next year, based on this year’s refund.

3. Get What You Need

Everyone puts off important purchases because they’re expensive, and it never feels like a good time to spend a lot of money. If your savings are in good shape and you don’t have a lot of debt, your tax refund might be the opportunity you need to get some of those need- or nice-to-haves on your list. You could also put it toward buying a home or a car, if that’s something you’re working toward.

4. Pay Off Debt

The longer you have debt, the more it costs you. Your tax refund could help you save money by reducing the balances on your credit cards or tackling that student loan debt you want so badly to get rid of. You can either target your largest debts, the ones with the highest interest rates or an account you can entirely pay off with your refund — whatever motivates you most to continue working on paying down what you owe. (You can go here to calculate the lifetime cost of your debt.)

There’s no one “right” thing to do with your tax refund, but no matter what you decide, try not to rush into spending that money. This opportunity only comes around once a year — though you don’t have to spend it all at once — and you can make significant progress toward your financial goals when you use your tax refund.

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