Here's how you should spend your tax refund

Smart Uses for Your Tax Refund

Are you expecting a tax refund this season? If so, you're probably dreaming about all the possibilities of spending what feels like newly "found" money. However, it's important to remember that this is your money, that you earned – not a bonus. A tax refund is issued when you overpaid the government.

Once you file your taxes and find out the amount of your refund, you have a little time to decide how to spend it. Use this time wisely and come up with a money-smart plan; if there's enough left over, earmark some for a little bit of fun as well. Here's a roundup of smart ways to spend your tax refund.

[See: Answers to 7 Burning Tax Questions.]

Pay off debt. A tax refund is the perfect opportunity to pay down some of your debts. Look at what you owe, and prioritize by balance and interest rates to find out which credit card or loan deserves the most attention.

Save it. Another wise way to use your refund is to not spend it at all and start or add to a savings account. If you don't already have an emergency fund, this is a perfect excuse to create one. It's generally recommended that you save between three to six months' worth of expenses in an emergency fund.

You can also put money toward a retirement fund like an IRA or 401(k). It's not typical to max out your yearly contribution, so you can probably invest more than you typically would and even get the added bonus of a tax deduction.

One more opportunity to save is for an expensive upcoming event, such as a family wedding or new car. If you know something is coming up, putting money aside now will seriously help your finances later.

[See: Your Month-to-Month Guide to Savings.]

Pay now, save later. Have you wanted to replace something old or rundown in your home but just haven't had the cash available? Invest in a purchase that will save you money in the long run. You might consider a higher efficiency appliance that will save you money every month on your utility bills, or new and improved windows or doors. Take a look around your home and see where else you might be wasting money and decide how you might improve the situation with a few smart purchases.

Make a donation. Use some of your tax refund to give back to others. Most people aren't able to financially contribute to causes as much as they would like, so this is a perfect opportunity to find a worthy recipient or add a bonus donation to your normal contributions. Plus, it can reduce your tax bill – just make sure to save receipts and itemize deductions.

Treat yourself. Of course, just like your everyday budget, it's not a bad thing to allocate a portion to having fun. Spending money can be like healthy eating – if you don't splurge a little every once in a while, you're more likely to binge eat (or spend) when you feel restricted.

As I recommended earlier, just plan how much you will put toward something fun ahead of time so it doesn't turn into out-of-control spending.

[See: 12 Ways to Be a More Mindful Spender.]

A few words of caution. Beware of a few easy traps you can fall into around tax season. Retailers, car dealerships and credit card companies will all try to take advantage of your tax refund, and will offer some tempting sales and financing. Stick with your plan and do your research on any major purchases to make sure you really are getting the best deal.

Lastly, if you're getting a large refund each year, take a look at your exemptions. You may want to adjust how much is withheld from each paycheck. Rather than a large lump sum, you could see this money in your income on a regular basis and work it into your everyday budget – and as a result, spend (and save) smarter.

Copyright 2015 U.S. News & World Report

Related: The world's biggest tax havens
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Here's how you should spend your tax refund

Cayman Islands

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