10 Smart Ways to Spend Your Tax Refund

P is for practical.

Hotly anticipating your tax refund? Before you splurge on that Jacuzzi you’ve always wanted or pile items into your virtual shopping cart, do yourself a favor: Hit pause, and consider finding a practical use for your money. What’s practical, of course, is relative to your circumstance, but mull over these ways to spend your check from Uncle Sam.

Start an emergency fund.

This may seem like a no-brainer, but if you have an unanticipated emergency, you’ll be glad you took this smart financial step. If you can’t stomach putting all of your refund in an emergency fund, put in half, says Martha Menard, a financial wellness coach in Charleston, South Carolina. “So many people are unprepared to handle even a $500 unexpected expense without going into debt,” she says. “Having an emergency fund gives you a cushion for the unexpected curveballs life throws.”

Pay off debt.

Between student loans, a mortgage, an auto loan and whatever else you may owe money on, you probably can’t get rid of all of your debt with a tax refund, but if the refund is substantial, you can probably get rid of a decent amount. “If you owe on credit cards, you’re paying double-digit interest rates,” says Nicholas Vail, a financial advisor and co-founder of Integrity Wealth Advisors in Indianapolis. “Paying minimums on these balances usually equates to spinning your wheels. A lump sum from a tax refund can help you pay down the principal on these debts,” he adds.

Sock the money away in a savings account.

Interest rates average .07 annual percentage yield for savings accounts these days, according to data from the Federal Deposit Insurance Corporation. But you can find savings accounts and CDs that are above the national interest rate average, and if you find some that are higher than 1 percent, consider that a win. And if the odds are good that you’ll still spend part of your tax refund on an article of clothing you’ll wear once, putting the rest in a savings account could help you make a little extra cash in interest.

Save for an upcoming expense.

Be proactive and save for those purchases you know you must make in the near future. After all, not budgeting for necessary but irregular expenses is a classic way to create financial problems. “The first step I would do is put some money into an emergency fund,” Vail says. “I prefer to see my clients keep their emergency fund in an online banking solution so that it isn’t in your everyday checking account.”

Repair something in your house.

Something always needs to be repaired or replaced, doesn’t it? Your house is probably your most valuable asset, and you want to keep it that way. Besides, you might find that money spent now saves you more in the long run; if something isn’t repaired, like water damage, it can just get worse. Even better, “these capital improvements can sometimes create additional equity,” says Andrew Housser, co-CEO of Freedom Debt Relief, a debt-settlement services provider in San Mateo, California.

Pay it forward.

It may not help you, but you could use the money to help others, suggests Matt Gulbransen, owner of Pine Grove Financial Group, a wealth advisory firm in Woodbury, Minnesota, a suburb of Minneapolis. “Research charities and organizations that support causes that you are passionate about. Find out if they need monetary donations or supplies,” he suggests. “It can be a fun family activity to pick out a cause you want to support or go shopping together for supplies to donate.” CharityNavigator.org has a helpful primer on the types of charities you might donate your refund to.

Put the money toward your retirement.

You could add money to your retirement account, or if you don’t have one already, set up a tax-advantaged investment account like an IRA, suggests Rob Williams, a managing director at Schwab Center for Financial Research in Denver. “According to recent Schwab research, more than 60 percent of people aren’t regularly saving toward long-term goals such as retirement,” he says. He adds that you really don’t want to put saving for retirement off. “Time in the market is key to reaching your goals,” he says.

Put the money toward your child’s or grandchild’s college education.

Your kids, or your grandchildren, are only getting older, and you’re going to be looking for colleges before you know it. That’s why Gulbransen suggests using your tax refund to start a 529 plan for your kids or grandchildren. “The opening amount can be as low as $25 to $50 and anyone can contribute to it,” he says. “Starting this plan now will help you give the gift of college and help your loved ones avoid being part of the 44 million Americans with student debt.”

Have fun.

Even if you do need to be responsible with the money, there’s no reason that you can’t take a responsible portion of the money and do something enjoyable with it, Gulbransen says. “Fun is in the word refund,” he says, suggesting that you take part of the money and do something fun with it and “spend it on an experience or something you’ve always wanted to do, like taking a weekend away to explore somewhere new,” he says. “You can invest in yourself and learn a new skill. Sign up for a cooking class you want to take; it may even save you a few bucks if you use those skills to start cooking at home more. Or you could buy yourself some time and hire someone to clean your house or mow your lawn,” he adds.

Be half smart.

If the idea of being practical with your money is killing you, that may not be an unreasonable feeling if you always work hard and never seem to get a break. On the other hand, maybe you always feel behind financially because you never do smart things with your money. Still, if you’re conflicted, you could split the difference. Most experts suggest taking 10 to 25 percent of the refund and using it for fun, such as a vacation or shopping spree.

Bonus tip: Create an opportunity fund.

Menard suggests carving up your refund and putting 20 percent into what she describes as an opportunity fund. “This is money you can use to take advantage of opportunities to purchase things you really need or were already planning to buy at some point when they go on sale or are deeply discounted,” she says, explaining the appeal this way: “You’re saving money on stuff you were going to buy anyway, without having to charge it and pay interest.”