From covering healthcare costs to paying off debt, there are wiser ways to spend your tax refund than vacations and luxury buys.

4 minute read

When you receive a tax refund, it’s tempting to blow most of it on dining out, entertainment, new clothes or a luxury vacation. However, putting that money – the average federal income tax refund is around $3,536 – towards making your life more financially secure is a better idea.

It’s not hard to find areas where your refund can make the biggest difference, but only you can decide where that money can pay off the most.

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1. Bolster emergency savings

Bolster emergency savings

When you have an emergency fund of at least $1,000 or more, you have a better chance of not having to pay for emergencies with credit cards, payday loans or other desperate measures.

Open a new emergency savings account, separate from checking and other bank accounts, and deposit your refund amount. Then commit to replenishing amounts you withdraw during a financial crunch.

2. Pay off credit card debt

Pay off credit card debt

Tired of making credit card payments every month while taking lunch to work every day because you’re broke? Knock credit card balances out of your life or lower credit card debt to a more manageable amount by applying your tax refund to credit card debt.

Once the debt is gone, vow to pay off new credit card balances each month so you won’t pay interest or get in over your head again. For incentive, take a portion of the credit card monthly payments you no longer have and use that money to treat yourself every month to something you couldn’t afford – like a massage or dinner out at a favorite restaurant – when you were deep in debt.

3. Make a lump sum mortgage payment

It can be hard to let that big refund go, especially for a distant goal like a paid-off mortgage. However, making one large, extra payment directly toward the principal each year can help pay off your mortgage sooner.

Not all mortgage loans allow extra or lump sum payments, however, so check with your lender before making the payment to avoid penalties.

4. Pay your refund toward your student loan

Pay your refund toward your student loan

One way to make a sizeable dent in student loan debt is to pay extra each month, especially when you have a large sum like a tax refund that you can apply in a lump sum towards the principal.

Call your lender before making the payment to ensure the amount will be applied to the principal and figure out the best strategy to help pay off your student loan sooner.

5. Open a new bank account for a bonus

Open a new bank account for a bonus

When you open a new checking or savings account with certain banks, you may be able to score a bonus ranging from $100 to several hundred dollars if you comply with terms and conditions requiring a minimum deposit or number of direct deposits within the first 90 days.

Bank sign-up bonuses come and go, so search online for the bonus that works best for you to open an account by depositing your tax refund and then add the bonus amount.

6. Fatten your refund with a credit card sign-up bonus

Fatten your refund with a credit card sign-up bonus

Many credit cards offer a sign-up bonus after you spend a certain amount within the first few months of opening a new credit card. With a large refund earmarked for paying off all charges each month, you can come out ahead by opening a credit card with a sign-up bonus. Be careful, though.

If you already have credit card debt, this isn’t a good use of your tax refund, since paying off debt is a better idea. Also, make sure you’re not charging things you don’t typically purchase just to get the bonus and that you have enough to pay the balance in full every month to avoid paying interest.

7. Begin saving for a down payment

Begin saving for a down payment

Whether you’re saving for a new car, house or other large purchase, depositing your tax refund into a savings account designated for a down payment is one use you’ll later be happy you chose. Putting down a large down payment means you can finance a lower loan amount, saving money on interest and paying off the loan in a shorter period.

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About the Author

Deb Hipp

Deb Hipp

Deb Hipp is a full-time freelance writer based in Kansas City, Mo. Deb went from being unable to get approved for a credit card or loan 20 years ago to having excellent credit today and becoming a homeowner. Deb learned her lessons about money the hard way. Now she wants to share them to help you pay down debt, fix your credit and quit being broke all the time. Deb's personal finance and credit articles have been published at Credit Karma and The Huffington Post.

Published by Debt.com, LLC