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We are closing in on tax day! April 15th, so if you haven’t filed yet, get after it! If you’ve been keeping an eye on any of the television commercials or online ads, you may have noticed a theme… We are getting bombarded by advertisements for a variety of tax preparation services. That’s right folks, it is that time of year again where we are all preparing for the begrudging task of filing our income taxes. So, I decided to give you 5 smart ways to spend your income tax refund.

5 Smart Ways to Spend Your Income Tax Refund

If you planned ahead last year in preparation for income taxes and you are receiving an income tax refund from the IRS, then you have some important decisions to make.

If you did not plan appropriately last year and you owe income taxes to the IRS, then you’ll need to make some changes this year so that you will not be facing another big tax payment next year.

But that will be a topic for another day…

Today, I’ll be talking about how to spend your income tax refund, that is if you are receiving one.

SPOILER ALERT: I won’t recommend that you buy a T.V. with your income tax refund!

We won’t be discussing the purchase of a bunch of material items, even though that can be really fun!

What we will be talking about is how to make smart spending decisions with your income tax refund.

While that may sound a little boring, I can assure you that it’s not.

These tips will help you to put even more cash into your pockets and put you on a path toward financial freedom.

Then you’ll be able to live the life you want without having to worry about finances!

This list will not cover every wise decision that you can possibly make with your tax refund since everyone’s financial situation is vastly different.

However, this list will cover most of the smart moves you can make with your income tax refund. Let’s get started!

1. Pay Off High-Interest Debt

This is likely not a surprise to most of you, but the number one thing you can do with your income tax refund is to pay off or pay down high-interest debt.

Do you have credit-card debt?

Use this as an opportunity to pay off or reduce that debt.

Do you have high-interest loans?

Knock them out quickly by using your income tax refund!

High-interest debt is one of the largest constraints to achieving personal financial freedom. Anytime that you have an opportunity to pay down high-interest debt, seize the moment!

2. Build Your Emergency Savings Account

Everyone should have a savings account to fall back on in case of emergencies.

Saving 3-6 months worth of income is recommended by most financial advisors, which is a financial goal that you can set for yourself, but any amount of savings is better than having no savings.

If you don’t use your income tax refund to save, head here and learn how you can easily save $1,000 in one year.

Why is it so important to build your savings?

As I mentioned above, high-interest debt cripples your financial freedom.

If you have an unexpected emergency, such as your car breaking down, and you do not have a savings account built up, you are likely to incur additional high-interest debt to cover those expenses, which is exactly what we are trying to avoid!

Dave Ramsey actually recommends building a $1,000 emergency fund prior to starting to tackle your debt.

3. Spend the Money on Something You NEED

The keyword in this statement is spending your income tax refund on something that you NEED!

You might try to justify certain purchases, stating that you need the item when truly it is something you want.

Even my 13-year-old has a solid grasp on needs vs. wants.

Below are some great examples of items that you might NEED:

Food

Shelter (Home Improvements)

Transportation (Vehicle Repairs)

Clothing

Medical Expenses or Procedures (If you’ve already incurred these costs, this could be classified under debt as well.)

Take care of your needs so that you can live a sustainable life and you won’t be incurring additional debt.

4. Increase Retirement Savings

Once you get some of these other items knocked off the list, if you still have some additional funds, another wise way to spend your income tax refund is to add to or start your retirement savings.

When you reach the age of retirement, you are going to need money to live off, unless you plan to work until you die.

Nobody wants to work until they die!

Plus, this is quite unrealistic since most of us will be physically unable to work that long. On top of that, who would want to?

You’ll thank me later on this one!

I missed out on $261,000 by making stupid mistakes with my retirement account when I was younger.

Don’t let that be you too!

5. Donate to Charity*

I put an asterisk by this one because I don’t think you should do this until your own financial house is in order.

It is wonderful to be able to help people, and donating money to charity is one really great way to be able to help a lot of people who are in need.

However, if you still have a lot of debt, or if you’re living paycheck to paycheck, with no retirement savings, it might be best to focus on those areas first.

Then you’ll build income and wealth, and you’ll have plenty of extra to donate as you get older!

Now, with that being said…

Find a charity that you are passionate about and make a donation with your income tax refund.

These charitable donations are also tax-deductible, which will help out your tax situation next year as well.

Final Thoughts

Don’t be afraid to make a minor purchase or splurge a little bit.

Emphasis on the little bit!

Like I said, please don’t use your income tax refund to go buy a big screen T.V.!!!

Especially if you have a bunch of debt.

Use a small percentage of your income tax refund (less than 5%) and treat yourself and your family to something everyone will enjoy.

You’ve been financially diligent with the other 95% of your refund, and you deserve to be rewarded a little bit.

What about you?

If you anticipate receiving a tax refund, what do you plan to do with it?

Drop your response in the comments below.

Peace,

Robert