Make a plan for your tax refund

Tax Refund

Not sure how to spend your tax refund this year? Here are a few ideas.

Pay for repairs, replacements, and upgrades

Have you been putting off home or car repairs? Getting a tax refund is a good opportunity to fix these problems before they get any worse. A small crack in your car windshield or leaky bathroom plumbing might just be an annoyance for now, but if these problems get worse, you could end up with a bill for costly repairs. Remember: an ounce of prevention is worth a pound of cure.

You can also use your tax refund to make your home more energy efficient. For example, repair old windows or buy new windows altogether to help keep your home cool in the summer and warm during the winter. Or  have insulation installed in rooms where it’s needed or replace an old furnace. Repairs and upgrades like these can lower your energy bills, add to the value of your home, and make it more comfortable year round. 

Invest

Your tax return could give your retirement fund a big boost.

The average tax refund for 2012 is reported to be over $2,700. If you invested only half of that ($1,350) in an IRA and received a 7% return, it would become more than $10,000 in 30 years. If you invested a similar tax return every year, you would have just under $147,000 in 30 years with a 7% return.

Pay off debt

You can look at paying off debt as receiving a guaranteed return on an investment. For example, if you only paid the minimum of a $1,000 balance on a credit card with an 18% interest rate, you would pay an additional $923 in interest over 113 months. Your total payment would almost be two times the principal balance! In this way, using your tax refund to pay off debt is like receiving a $923 return in nine years.

CC Calculator

Figures via Bankrate’s Credit Card calculator.

If you have debt with low interest rates (such as student loan debt, which can have interest rates below 5%), it might make more sense for you to invest.

Make a charitable donation

Do you have a favorite charity or a cause you would like to support? Receiving a tax refund is a good opportunity to make a significant donation. In addition to supporting a worthy cause, your donation can help you get another refund next year. But before you write a check, read our post about different ways to make charitable donations. You might find a better way to donate and give a charitable cause more support than you thought you could.

Just remember…

A tax refund is your money that is being returned to you. It’s not free money; it’s money that you worked for. If you have plans for all the other money you worked for, you should have a plan for your tax refund, too.

Do you have any other suggestions for using a tax refund? How are you planning on using yours?

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