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What do money-savvy people do with tax refunds or bonuses?

Try these 5 smart things to do with a tax refund, bonus or windfall.

If you’ve ever been on the receiving end of a windfall such as a bonus check, tax refund or small inheritance, you’ve probably been overwhelmed . . . and a little excited. Should you spend that extra on something fun and maybe even a little frivolous? Or should you put the unexpected total — even if it’s just a few hundred dollars — to work immediately (which may feel less rewarding in the short term).

Take a cue from what money-smart people do and learn how to use a tax refund wisely, make a bonus work for you and more.

#1: Get rid of debt

Almost no other financial decision has a higher return than paying down credit card debt, which has an average interest rate of over 16 percent. If you don’t have any credit card balances to pay off, attack another obligation. If possible, choose one that you’re closest to paying off so you have an almost-immediate feeling of accomplishment.

#2: Save it

Most financial experts recommend having an emergency fund of three to six months of living expenses, which can be the difference between financial difficulties and smooth sailing if you lose your job or incur an unexpected large expense. If you already have an emergency fund, consider adding the windfall to your retirement savings. According to calculations by NerdWallet, investing an average bonus of $3,000 in a Roth IRA will result in a (tax-free) $116,000 retirement fund after 20 years, assuming a 6 percent average annual return.

#3: Invest in yourself

This can take a number of different forms. Maybe there’s a class that will help you gain a work skill. Perhaps you want to learn something to help start a side business. The end result is that the investment will pay off in the years to come.

#4: Get life insurance

Getting life insurance is one of those things that’s synonymous with “adulting,” and, unfortunately, it’s something that many Americans — about 40 percent — don’t do.

#5: Buy something you need

Is the washer on its last legs or the lawnmower in danger of conking out before summer ends? Put a windfall to use by replacing must-needed items to help prevent a dip into an emergency fund.


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