When you wake up with a large tax refund, it can be pretty hard not to splurge it on something fun and expensive, like a long cruise. However, you should keep in mind that a large tax refund is a big chance to boost your current financial situation.
Here’s what you should do with your tax refund:
1. You should pay off any high-interest-rate credit card debt
When you have a high-interest-rate credit card debt, paying it off should be your first “investment,” says Cynthia Meyer, a certified financial planner at Financial Finesse. This is mainly because the return on your money is equal to the interest rate—plus it is guaranteed and free of risk.
For example, if the interest rate on your credit card is 24 percent, then every single dollar you put toward that debt is essentially seeing a return of 24 percent (much higher than you’d likely get in the market). What about paying off your other debts, such as your mortgage, student loans, or your car note? Those who aren’t retired yet might want to pay off their mortgage before they retire.
Take into consideration if your return will be better used to pay off credit debt, or another debt (such as those mentioned above). Interest rates on federal student loans are about 5% to 7%, mortgages are 3% to 4%, both being tax-deductible. So, as you probably guessed, getting rid of the debt that accrues the most interest is the wisest thing to do, as it will minimize your overall payments.