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Save or splurge? Tips to put your tax refund to work

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You've been waiting to exhale all tax season, but now the math is done, the return is sent, and the only thing left to do is wait for your refund. In the meantime, this is a great time to map out what you're going to do with the money.

According to a 2017 survey by Credit Karma Tax and Qualtrics, taxpayers are getting smarter about how they spend their refunds. The majority of respondents planned to spend their refund on practical financial goals, such as paying off debt, increasing savings or paying down credit cards. As you're making up your own list of savings and splurges, here are a few ways to put your refund to good use:

Tree growing dollar bills.

1. Start or grow your emergency fund

No matter how well you plan for contingencies, life happens. Whether your crisis is a leaky roof or a medical emergency, a rainy day fund can make a huge difference. Unfortunately, nearly a quarter of Americans have no emergency savings, according to a recent study from Bankrate.

Consider using your tax refund to kick start your savings. If you already have three to six months of salary tucked away, you're on the right track. Your refund can be an extra boost, or the perfect start for your rainy day fund, a separate savings account that you can tap into for small financial hiccups or a sensible splurge, such as cosmetic dentistry or small home renovations.

Scissors cutting a dollar bill in half.

2. Pay down high-interest debt

According to a recent study by NerdWallet, the average US household carries almost $7,000 in "revolving" credit card debt—which means debt that they are carrying from month-to-month. On average, these households are paying $1,141 per year in interest. If you've got credit debt dragging you down, think about using your tax refund to reduce your credit card balance.

Another option is to pay down student loans, according to Michael Kalscheur, a CFP and senior financial consultant at Indianapolis-based Castle Wealth Advisors.

"Lots of people have multiple loans over multiple years," Kalscheur says. "Usually they apply their refund to the highest-interest one. That way, they can also pay the other loans off faster."

Penny being put in a piggy bank

3. Save for the future

Saving for the future sounds like a great idea, but what's the best way to do that? Should you build your retirement fund? Save for college? Put aside money for healthcare?

Jason Klein, a certified financial planner with Allied Wealth Partners in Parsippany, New Jersey, says that the answer depends on your current financial life and your long-term goals. For example, he says, you can borrow for college but you can't borrow for retirement. Although some people bristle at the idea of student loans, he says that students will have a long time to pay them off, unlike older people who may be behind in their retirement savings. In this case, it could be best to apply your refund to an individual retirement or workplace retirement account.

If your retirement planning is solid, then Klein suggests a 529 plan. Since the funds can be used for both college and private school, and can grow tax-free, it's a great investment in your child's education.

If you're set on retirement and college savings, examine your health insurance plan to see if you have access to health savings account (HSA). With an HSA, you can put money away for current and future out-of-pocket health care expenses. And unlike a flex spending account, HSA funds roll over and accumulate every year that you don't use them.

Champagne glasses filled dollar signs toasting eaching other.

4. Treat yourself — a little

If you're a saver, your first instinct may be to use that tax refund for an extra mortgage payment or put it in your child's college savings account. But instead of trying to decide between saving or spending, why not do a little of both?

For example, you can put half of your refund in savings and spend the rest on an unforgettable experience. A 2012 study published in the Journal of Positive Psychology found that people consider experiences more valuable and psychologically beneficial than material goods.

"Buying experiences has a strong, positive, long-term return from a happiness perspective," says Katherine Roy, Chief Retirement Strategist at J.P. Morgan. “Think about travel, and vacations. Family dinners, or family holidays in which you are able to share really magical times."

Whatever you decide, it's always best to make a plan and hold yourself accountable for how you choose to save or spend your tax refund. The discipline you learn from sticking to small, measurable goals will help you build a bright financial future.

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