5 smart splurges to make with your tax refund


Paying down debt, saving for retirement and building an emergency fund top the list of smart things to do with a tax refund. Yet, could there possibly be anything more boring to do with that influx of cash? Here's how to balance out a practical use of the money with a smart splurge for the rest.

"They could take a few hundred dollars and buy a quarter-million-dollar life insurance policy," says Peter Tedone, president and CEO of Vantis Life Insurance Company. Life insurance fits squarely into the "no fun" category for many people, but spending just a little bit on this necessary purchase can make a splurge feel that much better. "Just think about how much more you're going to enjoy your vacation because you didn't blow [all your refund]," Tedone says.

[Read: How to Save Your Tax Refund for Retirement.]

As for what to splurge on, experts suggest the following five things:

A major purchase. If your tires are bald and the transmission is clunky, it might be a smart splurge to make repairs or invest in a new car. While the average tax refund won't necessarily buy you a decent used car, you could use that money as a down payment.

Adding the money to a new house fund can also feel more rewarding than simply placing it in an emergency fund with no defined purpose. If you already have a house, a tax refund can help you refinance at today's interest rates before they climb any higher. "It's a great opportunity to pay the closing costs to refinance a mortgage," says Mike Piershale , president of Piershale Financial Group in Crystal Lake, Illinois.

Improve your home. Whether you need to patch a leaky roof or want to install some special landscaping, home improvements are another smart way to splurge with your tax refund. "There are things that make you feel good, but also help your investment value," says Leslie Smith, chief planning officer for Chevy Chase Trust.

Vince Liuzzi, executive vice president and chief banking officer for DNB First, says people might also consider spending a tax refund on something they normally wouldn't buy for their home, such as solar panels. "You help the environment and help your [utility] bills," he says. "It gives you that feeling of being socially responsible."

[Read: How Saving in an IRA Can Reduce Your 2016 Tax Bill.]

Take a getaway. Taking a vacation might seem like the furthest thing from a smart use of a tax refund. Indeed, finance experts seem split on the wisdom of this splurge. Liuzzi recommends people spend their money on something tangible, but Smith disagrees. "Splurging [on travel] from time to time can be healthy," she says. Several studies back up that assertion and have found vacationing can reduce stress, improve heart health and increase productivity.

The key is to select a trip that won't cost more than you can afford to spend. Smith has one client who used an unexpected tax refund to take his son to London. It was a big trip, but made sense given his overall finances. Someone with limited resources and a smaller amount of money in the bank may be better off using a tax refund for a day trip or a nearby weekend getaway.

Make a charitable or political donation. For the person who has everything, giving money to a favorite charity can be a smart splurge. These gifts can, in some cases, result in recognition from the organization or a tax deduction for next year.

With the current political climate, some people may choose to give money to a political candidate or cause instead of a charitable one. "You won't get a deduction, but it might make you feel good," Smith says. Plus, the money could end up having a long-term positive impact on you and your family, depending on how the receiving organization is able to influence public policy.

[Read: How to Claim the Retirement Saver's Credit.]

Invest in yourself. A final splurge for your tax refund is to use it to pay for self-improvement. "I always feel good about decisions to invest in myself," Liuzzi says. Professional certification or training could further your career, while a gym membership or hobby class could be personally rewarding.

While these can all be smart ways to spend a tax refund, Piershale says people shouldn't think of that money as a windfall. "If you're continually getting a tax refund, it may seem fun or psychologically rewarding, but you're really just giving the IRS an interest-free loan," he says. In that case, the best course of action may be to change your tax withholding so you can receive bigger paychecks all year long instead of getting a windfall in the spring.

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