5 Smart Ways to Spend Your Tax Refund

04/30/2015 10:39 pm ET | Updated Jun 30, 2015
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By Paula Pant, contributor

Congratulations, you've gotten a tax refund! Now, what are you going to do next?

If the only answer that comes to mind is a cheeky "I'm going to Disney World!" never fear. Here are a few better ways to spend that windfall that will help you set yourself up for future financial success.

1. Build an Emergency Fund

Many financial experts recommend putting aside at least six months' worth of living expenses in an emergency fund. This cushion will help you cope if you find yourself facing any number of sudden hardships, from a job loss to an illness to a pricey home or car repair. These unexpected costs can tank a budget if you don't have the overflow to cover them.

Put your tax refund towards your emergency fund, regardless of whether this is your first step towards starting one, or whether you're building on one that you already own.

2. Pay Down Debt

Debt is a drain and a burden on your finances, both now and in every year in which you carry an outstanding balance. It limits your ability to pursue other financial goals and siphons away your hard-earned money while you -- in effect -- pay several times the original purchase price of items you likely don't even remember buying anymore.

One great way to put that tax refund to work is to use it to start paying down your debts as soon as possible. A popular method you can use is the "snowball method," which involves ranking your debts by balance from smallest to largest and throwing every dime at the smallest debt until it's gone. Then, you move down the line to the next smallest debt. This method is a great way to see forward progress, feel the thrill of wiping debts off your list and build momentum. Putting your tax refund towards your smallest debt may allow you to either wipe it out completely or at least make a huge dent in your balances.

3. Max Out Your IRA or HSA

In 2015 you're allowed to contribute a maximum of $5,500 to an IRA, which rises to $6,500 if you're age 50 or older. If you're eligible to contribute to a Health Savings Account (or HSA), you're allowed to contribute up to $3,350 as an individual ($4,350 if you're 55+) or $6,650 as a family ($7,650 if you're 55+).

All of these accounts are great ways to plan for the future. If you've already got your emergency fund in place and your debt taken care of, why not consider putting your tax refund towards one (or both) of these worthy goals?

4. Save for a Single Goal

In addition to emergency, retirement and health savings, most of us are working towards other savings targets, and your tax refund could be a nice boost to any of those goals.

You can set aside money for your holiday spending; it's never too early to build a fund to cover the travel, gift-giving and party-hosting of the holiday season. You could put your refund towards a family vacation fund, your children's college tuition funds, or finally getting your roof repaired. Give yourself extra motivation by opening a separate savings account for each of these goals and creating a nickname like "Cancun or Bust!"

5. Give to Charity

If all of your financial ducks are in a row (first of all, good for you!), you can always consider using your tax refund to create a donation to a charitable cause. There's something in it for you, too, beyond that warm, fuzzy feeling of knowing you've made a difference; many charitable donations are tax deductible, which can help you when you're filing your 2015 returns. Check out for a detailed list of the many ways you can claim a deduction for your charitable giving, or speak to your financial advisor.

Bottom Line

Regardless of how you choose to spend your tax refund, the most critical tip is that you make a conscious decision about how to use that money.

Don't let your tax refund slip through your fingers in small increments: Spend an extra $30 here, an additional $60 there, and pretty soon you've blown through your tax refund without any idea of where or how you spent that money.

Instead, deeply consider how this small windfall can help you make progress towards a goal, whether that's building your retirement funds or amassing enough savings to pay cash for your next car. Apply the entire lump-sum towards that goal. By doing so, you'll never need to wonder where the money disappeared.

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