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7 smart uses for your tax refund

Tax refunds are the only windfall many people ever see, and there's a big temptation to blow it all on something fun. There are better ideas.

By Stacy Johnson Feb 27, 2012 6:30PM

This post is from Brandon Ballenger at partner site Money Talks News.


Last year, more than 64 million Americans received an average tax refund of $2,985, according to the Internal Revenue Service.


Where did they spend it? Everywhere. On everything from everyday expenses to vacations and big-ticket items like giant TVs, according to a National Retail Federation survey. About two in five said they used the windfall to pay down debt. (Post continues below video.)

Changing your tax withholding on your W-4 at work, as Money Talks News founder and CPA Stacy Johnson suggests in the video above, is one way to make sure you don’t waste a refund -- you’ll get to keep more pay year-round instead of receiving a fat check from Uncle Sam.


But if you’re not sure what to do with your refund this year, here are some ideas that will make you richer -- either by protecting your bottom line (from fees, interest charges and frivolous spending) or by offering memorable new experiences.

  1. Pay down debt. Resist the urge to splurge. Use your refund to reduce high-interest balances. Not only does this cut down the interest charges and overall amount you owe, it may also improve your credit score by lowering your credit utilization ratio. A better score can mean easier access to credit at better rates.
  2. Create an emergency fund. Living paycheck to paycheck often makes it difficult to do anything else -- there’s never enough money to get ahead. Use your refund to build a financial cushion, ideally enough to cover at least three months of living expenses. That way, bills always get paid on time (no late fees), you never need a cash advance (no high interest charges), and you can stock up on bargains at the grocery store. The peace of mind: priceless. If you’ve already got that covered, set the money aside for something you know you’ll have to replace eventually, like your next car.
  3. Save on insurance. Speaking of vehicles, many car insurance companies offer a discount if you pay the six- or 12-month premium in full. Use a chunk of your refund to do that, and put the rest in a savings account so you can raise your deductible and lower your rate even more.
  4. Get a bigger refund next year. Make energy efficiency improvements to your home, pump up a retirement plan, or donate your old stuff to charity (to make way for the new) and your tax refund will be doing double duty.
  5. Start a business. Use your refund as seed money for a small side business or some classes in a skill or craft you’ve always wanted to learn. You could launch a website and sell your own arts and crafts, for instance, or start a garden and sell your extra fruits and veggies at a farmers market.
  6. Think big. If you’re going to blow the money, make it an event to remember -- maybe take the family skydiving and get video of it -- instead of frittering the refund away in forgettable ways. There are still ways to save on travel, too. 
  7. Invest. Think for the long term instead of right now. You could start funding a 529 college savings plan or open an individual retirement account for yourself -- 10% a year for two decades will turn your $2,000 refund into $13,000, and you can include future refunds to make it balloon even more. 

More from Money Talks News and MSN Money:

VIDEO ON MSN MONEY

18Comments
Mar 1, 2012 11:46AM
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I paid down some of my debt with this year's refund. No more credit card debt as of last week. And because they are paid off I will have the extra money each month this year to pay my student loans off by the end of the year! Feels great and I am free of those annoying credit card balances!!!! I highly recommend it!!
Mar 1, 2012 8:16AM
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Or you could catch up on the electric bill and buy groceries...
Mar 1, 2012 10:52AM
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"an individual retirement account for yourself -- 10% a year for two decades"

 

Where are you getting this rate of return...selling dope? 

Mar 1, 2012 10:48AM
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how about use it for paying for that gas to go to and from to work
Mar 1, 2012 9:54AM
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I have no problem deciding what to do with my tax refund that has already been decided for me. My Federal Tax refund goes right down the street and is used to pay my local real estate and school taxes.
Mar 1, 2012 9:06AM
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My Federal refund goes towards paying my State taxes.
Mar 1, 2012 11:40AM
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Paying down debt is the best option then saving the rest would be most logical...after working hard and paying taxes ll year, splurging just a little isn't a bad thing though
Apr 10, 2012 6:07AM
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10% a year yea right!!!  On what planet?
Mar 26, 2012 4:24PM
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I bought a new house a couple of years ago and used the refund to pay off all my debt with those two years refunds. I adjusted my W2 so that I ended up only getting $300 (Fed) instead of $5000 this year, along with the reduced SSN withholding I've added an additional $8000 into savings( not 401K, that's maxed already) over my normal amount saved. Having no bills and extra cash every pay period makes me want to save more and think about every purchase I make. I now have a rainy day fund that will cover mortgage, utilities and property taxes for 14 months instead of 3 months.

Mar 27, 2012 12:29PM
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Toldin: I'm not criticizing but be aware that you are giving the governement YOUR money interest free, all year long.  You may want to open up an ING Direct account and at least make some interest off it AND it will be easily accessible to you at all times.

 

I claim 3 and I am alone - I need the money every month to stay on top of my bills and when tax time rolls around, I either get a couple of hundred or I pay a couple of hundred.

 

 

Mar 27, 2012 11:37AM
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Better yet, change your withholding so that you have extra money ALL YEAR LONG -- especially if you're in debt. Instead of racking up continued interest charges, increase your deductions so that you have a couple hundred extra dollars each month to reduce your debt NOW instead of waiting for the government to finally get around to issuing your refund.

It's legal, it's smart, and your employer must respond to your request immediately. There's no good excuse not to do it.

Mar 2, 2012 6:51PM
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every year when we get our tax refund we use it to pay our bills, in cash, for the year in advance. this year we paid for our phones and internet, so that's taken care of through the end of next February. this way, even if something should happen (heaven forbid), like if my husband lost his job or had to go on medical leave or something, at least we have a few less things to worry about. 
Mar 27, 2012 12:33PM
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But I forgot to mention and I apologize: I claim 3 but I have a mortgage on which I pay interest and THAT saves me from owing the IRS more than a few hundred.
Apr 10, 2012 12:33PM
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10% return a year for a decade turns $2000 into $13000, 10% what a joke, try 3% max.
Mar 25, 2012 2:58PM
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We pay too much in on purpose so we usually have 5-6k tax return.  It first goes to replenish our emergency fund if its down or needs a boost.  Next, we would buy something we NEED (like a new fridge to replace the one that's starting to run bad).  Anything left over is used to pay down the principle on the mortgage.

Although this year we spent 500 on a rescue group to get two new dogs who lost their home..

 A perfect investment!!!

Mar 1, 2012 1:18PM
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With all these new casinos popping up, time to roll some dice and double my money before more political hands are put in my pocket.  Come on box cars!
Mar 1, 2012 2:54PM
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Well it started out as a pretty decent article with great suggestions for improving ones financial standpoint and making positive steps towards future improvements.  Then SKYDIVING!!  Really?  Really? Congrats to Stacy Johnson for completely derailing the article and destroying any bit of credibility on that one.  Maybe she meant to say "take out a huge life insurance policy with your refund........then go skydiving"
Mar 1, 2012 12:43PM
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Getting a refund means you paid to much in taxes during the year!

 

You're better off having to owe Uncle Obama a little at the end of the year.

 

If you get a refund INVEST IT! Dont buy crap with it.

 

NObama in 2012!

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