Every spring, tax refunds total nearly $125 billion, about $3,000 per person. If you’re one of the millions of Americans that will get a refund this year, you’re probably wondering what you should do with the money. Below are five smart ways to spend your 2016 tax return.
Pay Off Debts
The first thing you should do with your refund is pay off some debt. Start with high-interest debt such as credit card debt. If you are able to pay off the balance of a card with high rates or fees, get rid of it as soon as possible. If you have any leftover funds, you can put it towards your mortgage or student loans.
Invest in Your Retirement
If you put money into an IRA or Roth IRA, you can withdraw your money tax-free after you retire. Use the money that you got from your refund to build a lifestyle for yourself post-retirement. Either add it to your current plan or start a retirement fund if you don’t have one already.
Start an Emergency Fund
If you don’t have an emergency fund, use the money from your tax refund to create one. If you have used your emergency fund recently, rebuild it. You should enough money to pay about 3 months of necessary expenses set aside in case you find yourself in an emergency. At the very least, you should have $1,000 in your emergency fund.
Spend It on Something You Need
If you have something that you have needed for a while, but just haven’t had the funds to do, use your return to do it. For example, if your brakes have been wearing down but you haven’t been able to replace them yet, use your refund to take care of them. Just make sure that it truly is a necessary expense, and not a frivolous purchase.
Set It Aside
If you are planning a family vacation later on in the year, or a renovation project, set aside your tax return to help pay for those things. That way, you won’t have to use your credit card or take money from your savings account. It may also be a good idea to set your refund aside for Christmas. If you have a savings account that offers a little more interest like a CD, put it in that account as it will grow faster than a normal account.