Smart Ways to Spend the Tax Refund?

As I mentioned in my previous post I do not get a tax refund but many people do. Either they are perhaps too cautious on the tax calculations month to month or perhaps they have several tax write off options which give them a refund. 

So what to do with the refund?

First of all, it is important to remember that this is not a windfall. It is your hard earned money and as such this should not just be spent on random things so that in a months time you have no idea where it went. So here are some great ideas on what to do with it. I have tried to order them more or less in the order of importance. I think the first three should be clear priorities if you have not done those previously.

• Start or top up the emergency fund. Having an emergency fund is something everyone should have so that if something happens you would not need to take out (credit card) loans. So it is extra money you do not use for daily living expenses but is there for cases like your car breaking down or you losing ypur job etc. I have written a longer post on it here. If your emergency fund covers currently less than 6 months living expenses I would suggest you use the money to top this up.
• Pay off debt. This is a rather individual topic as people deal differently with the dept. I would say that paying off any debt which is more than 4-5% interest should be a priority. So any credit card debt, consumer loans, car loans etc. As the interest rate is higher than the general inflation any debt you pay off will save you money in the long run and the more you are able to pay off the principal balance, the less you need to pay in interest. If you have a low-interest mortgage loan perhaps this is not a priority. But it also depends on your personal preference. Although many mortgage loans are similar interest rate to inflation and perhaps paying them off is not financially best idea (instead of that paying the monthly dues and investing the extra money might be the financially better plan) I personally hate the feeling of owing money and I would sleep better with less money owed.
• Start investing/invest the money. If you already invest- great add the money to an investment portfolio. If you are not yet investing, start now. This is money you in all likelihood did not miss from your monthly budget so it is perfect for a first investment. If you do not know where to start I would look into ETFs (I use LHV Growth Account service) or if you are more adventurous and would like to try p2p investing them perhaps Mintos is a great place to start (look for payback guarantee loans).
• Make one time purchases. I think we all have some things in our lives which would need some upgrade. And I do mean needs, not just wants. So think about it. Perhaps your home would really need some repair work or your car should go to the mechanic? When was the last time you went to the dentist? Do you know which money you will use to buy wood for next winter heating? Thinking of these larger costly things is important and if you keep an eye on these things they will not surprise you in the most inopportune moment. Also if you perhaps have been saving up for some larger project such as a new roof then add this money to the cause.
  As I stressed - think of one time purchases. I think it is important not to spend this money on any type of subscription service, be it TV, monthly boxes, gym membership or something else. This money should not be the easy entry into additional monthly costs for the rest of a year. Unless...
• Becoming smarter. Investing in yourself is also important life goal and this can both improve the mindset and your earnings. So the only subscription type service this money perhaps could go to, is a bigger down payment on a course you have been meaning to take or a subscription to an educational book service etc. I personally use the Äripäeva raamatuklubi, which is a service offering 1 or 2 books a month on financial and business topics. As I can decline any book I am not interested in (I do it most months) and the books I do want are cheaper than in stores, I feel OK to use this service. This service does not cost anything to enter so tax refund does not really play a role here but I thought of mentioning the service as it might be interesting to my Estonian readers. But a university course, language course, online courses- there are many options and if you have been meaning to take this step this is a great time to start a course you are interested in.
• Donate. I think in the times where you are doing all right, it is important to look also to those less fortunate than you. So using perhaps part of this money to a cause you believe in, is a great way to spend it. Everyone is passionate about different things, I tend to give to animals. I have for many years adopted different Tallinn zoo animals with my friends as a group effort. I have given to animal shelters and I also have an adopted saiga antelope somewhere in Mongolia and my mom has an adopted sea turtle. Maybe you give to a women's shelter or to people with disabilities or disease research, any cause you believe in is important.
  One organisation I would like to point out to you is KIVA. Technically it is not donation... Kiva allows you to lend money to people in need in different countries of the world. The money is usually spent to set up some kind of business on the local scale. So there is a possibility of profit for the person getting the money and this profit is used to pay back the loan. The loans are with no interest, so it is an easy way to make someones world a better place and when you get back the money perhaps to lend it to the next person. On the site, you can select the person you lend to based on location, goal etc and you see the person asking for the money. So it is a personal experience and you can choose a topic you care about (water security, refugee, single parent, arts, schooling etc). If nothing else, just look at the site and perhaps help out someone, the minimum loan is 25$.
• Spending on time with your family. Although I do not feel using this money on a vacation or such one-time costly event is a good idea there are some things that can seem costly but bring a lot of joy to the family. I personally love different types of board games with friends or family. And some more elaborate games cost around of 80-100€. This is a lot of money for "just" a game. But if you do the research on what game to get and think about how many cosy evenings you will spend playing it- it is one of the best ways to spend money. I personally do not enjoy too complicated games but I do not mind if they take a lot of time to play. So things like Bohnansa, Carcassone, The Great Dinosaur Rush, Mexican Train, Forbidden Desert, Discworld, Organ Attack, Citadels, Cards Against Humanity, Fluxx are some of my favourites... I mean there are so many good ones and selecting something for your needs can guarantee great evenings for years to come. 

As you can see this is not a list where you need to select just one thing. If your refund is a bit bigger perhaps using 5-10% of it on just buying something you want is a great idea, and then using 50% on debt payoff and maybe some for the home and maybe donating a bit is a great balance for you? Maybe putting all of it into the emergency fund is the best solution for you? 

I can not tell what is the right answer, but I hope you will think about it and will not just mindlessly spend it on things you will not able to remember what they were in few months time.

Also if the money is in the main account you use day-to-day it is easy to spend it without meaning to. So if you have not yet decided what to do with it, put it on a savings account or a secondary account until you decide- this really helps :)