1. Clean-Up Your Balance Sheet
Paying off a debt is like earning a guaranteed rate of return
Pay off small balance debts to free-up cash flow
Pay off high interest rate debt to save money long-term
2. Save for Short-Term Goals
Build a cash cushion so a surprise doesn’t become an emergency
Bolster short-term savings for upcoming expenses
Complete Projects and deferred maintenance
3. Invest for Long-Term Goals
Boost your retirement savings
Start a college fund
Invest for other goals
BONUS: Charitable Giving
If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You’ll feel good — and you’ll be rewarded for your good deed when you file your tax return next year (charitable contributions are deductible if you itemize). You also can use your refund to open a donor-advised fund. This is a kind of charitable investing account where your charitable dollars can grow over time. You can claim a tax deduction (if you itemize) in the year you make a contribution to the fund, and the money can grow over time until you decide which charities you’d like to support, or split your giving over multiple years.
There are many good uses for a tax refund. If you have debts or lack an adequate emergency fund, the answer is easy. If you’re down to your mortgage and have a comfortable savings account, then you have some options. Decide what does the most good to improve your financial well-being at this point in time. That answer will be unique to your family and your financial goals. And if your refund was substantial, consider giving yourself an immediate raise by adjusting your tax withholding to increase your monthly take-home pay.