The most popular single use for the cash taxpayers get in refunds is savings, according to annual surveys conducted by the National Retail Federation. Last year’s survey found that nearly 44 percent of the people who anticipated refunds planned to put at least some of it into savings.If you're fortunate enough to receive a tax return this year, consider following suit and putting it in savings. Here are some other financially smart uses for your tax return.
- Pay any overdue bills. Overdue bills are bad for several reasons: They incur late fees and penalties and can wreak havoc on your credit score, to name a few. If you are overdue on any bills, use your tax return to get current.
- Pay off high-interest debt. Work toward eliminating debt by paying off -- or at least paying down -- high-interest credit card balances. Reducing or eliminating debt can boost your credit rating and improve your monthly cash flow. Paying off credit card debt with your tax refund can also relieve some of the burden of carrying a heavy debt load this year. It's generally best to pay off debt with the highest interest rate first.
- Build your emergency fund. An emergency fund is an important part of any healthy financial plan. You never know what will happen and when, and having an emergency fund can help you avoid going into debt. If you are just starting your emergency fund and have other debt, work on building your emergency fund up to $1,000 or $2,000, then work on paying off the rest of your debt. If you have no debt other than a mortgage or other low-interest debt, work on building your emergency fund up to three to six months of living expenses. That will give you peace of mind and the ability to work on other financial goals.
- Make an extra mortgage or car loan payment. Consider paying off your mortgage faster or reducing the balance on your car loan with this year's tax refund. Reducing the loan balance on these larger accounts can reduce your monthly payments or shorten your debt repayment period. Making a larger, lump sum payment toward a mortgage or car loan can also increase your net worth because you will be carrying less debt.
- Book a vacation early. If you're considering taking a vacation this summer, plan as far in advance as possible to get some great deals on airline tickets, hotel rooms and all-inclusive resort vacations. Booking early can save you money and stretch those tax refund dollars. Take some time to shop around for the best deals. Even though last-minute deals are out there, you can often score even better deals when you plan your trip at least three months in advance. Booking early will also give you time to pay off your travel before your getaway, reducing the chance that your vacation will wind up creating lingering credit card bills.