There it is, staring you in the face like the last golden ticket—your tax return. But before you make a beeline for the nearest mall or deck out your living room with the latest entertainment system, take a moment to consider the lasting effects of your decision. Maybe you will be happier spending it on a much-needed splurge. Or maybe you’ll get the most reward by using it to safeguard your financial future. Either way, here are smart ways to spend or save your refund for many happy returns.
For the Fun of It: Indulge in Your Urge to Splurge
You’ve been playing it safe most of the year. Aside from a little late-night online shopping, you’ve managed to stay on budget and sock away some funds for a rainy day. Hey, everybody deserves a little fun. As long as you’ve planned for the future and don’t have any major debts, fun can definitely be in your forecast. But before you start giving into your every whim, consider these smart takes on splurging:
- Go for quality, not quantity. Instead of hitting the sales and buying everything in sight, really think about what you want and do a little research if necessary. Sure, that cute pair of running shoes is on sale, but will they give you the right kind of arch support to make your Saturday morning runs more comfortable? And do you really need 10 new outfits? How about instead you buy five quality pieces and a meal at that expensive new restaurant you’ve wanted to try? When you choose wisely, you’ll get more satisfaction and enjoyment in the long run.
- Make plans to get away. According to a study that measured the effect that vacations have on overall happiness, the largest boost in happiness comes not from the act of taking a vacation, but from the simple act of planning a vacation. It turns out that the anticipation of a vacation can boost overall happiness for up to eight weeks in advance. Plus, there’s no quicker way to ruin a post-vacation glow than to be faced with mounting credit card bills from vacation-related expenses. The solution is to put some money away ahead of time so you can look forward to it all year and enjoy memories without regret.
- Consider an experience instead of material purchases. Did you always want to take a photography class? Go for it! Or maybe you’ve always wanted to try scuba diving. Whatever it is, don’t delay it any longer. Sometimes experiences prove to be far more rewarding than anything that you can buy in a store.
- Spend part of the money on someone else. A series of high-profile studies published in Science concluded that spending money on someone else boosts happiness more than spending money solely for one’s own pleasure. So go ahead and take your mom out to dinner or donate some much-needed items to a local charity. The lasting return on your own happiness will more than make up for the amount you spend.
Frugal Finances: Smart Ways to Prepare for Your Future
Maybe you’ve decided it’s time to get serious about your finances and are opting to spend your tax return on something less tied to immediate gratification. Whether you’re in good financial shape or have a mountain of credit card debt, a sizable tax return is a great way to get you on track to reach your financial goals. Here are some sound strategies that can reduce financial stress and position you for a brighter fiscal future:
- Build a healthy emergency fund. The best way to plan for the worst is to set up an emergency savings account with enough cash to cover nine months of living expenses—just in case you lose your job or run into an unexpected financial emergency. Obviously, one tax return will not fund the entire account, but it will provide a healthy starting point. To build the rest, set up ongoing automatic deductions directly from your paycheck or primary checking account.
- Refinance your mortgage. If the going mortgage rates are at least 1% lower than the rate of your current mortgage, one of the best investments you can make is to refinance. You’ll pay fees up front for the process, but what you’ll save in interest will more than make up for the initial costs. To find out how much refinancing your mortgage may cost and if it’s right for you, check out the Federal Reserve Board’s Consumer’s Guide to Mortgage Refinancing.
- Make an investment in education. Education can offer a big return on investment, either for yourself or someone else. If you’re looking to invest in your own career, use your tax return to fund college courses, graduate school or professional training. Your employer may offer to pay for all or part of any job-related education, so ask first before you make the investment. If you’re looking to fund your children’s or grandchildren’s educations, a 529 Plan may be the way to go.
- Jumpstart your retirement savings. When it comes to saving for retirement, it’s better late than never. Even if you’ve never saved a penny, you’ll be better off having something than nothing. Does your employer match your retirement contributions? If so, take advantage of this money-making perk by putting as much as you can into your 401(k). If you don’t have a 401(k), fund an IRA or open a Roth IRA—both of which offer tax advantages over most other investments and savings accounts.
Whether you choose to treat yourself now or make a far-reaching investment for the future, planning how you’ll spend your tax return is always a smart move. Like anything in life, a little forethought can help prevent regrets and provide an even bigger reward in the end.