Here'€™s How to Get the Most From Your Tax Refund
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“Taxes” and “nice surprise” aren’t typically uttered in the same sentence—unless, of course, you’re talking about refunds. While receiving one means your W-4 withholdings weren’t completely accurate (so you essentially gave the government an interest-free loan), it’s hard to complain about getting a check you didn’t anticipate.

Now, you ask, what’s the right way to spend that $1,000—or whatever amount—that’s about to hit your bank account?

The best way to divvy up those funds will depend on your answers to the following questions, says Certified Financial Planner Edwin Draughan of Strong Wealth Management in Manhattan Beach, Calif.

What’s my debt situation? The biggest detriment to wealth is consumer debt with a high interest rate, so using a large chunk of your refund—say, 70 percent—to pay down your balances can go a long way toward your overall financial fitness.

“Paying off high-interest debt is essentially investing in a guaranteed [high-yield asset]. The more you pay it off, the less you have to pay. Interest saved is interest earned,” Draughan says.

Do I have a short-term emergency fund? Next, assess your just-in-case cash stash. “This is for smaller emergencies, usually dealing with paying an unexpected deductible or insurance copay—health, car or home,” says Draughan. Having this money tucked away keeps your financial plan on pace no matter what happens.

Financial advisors generally recommend you have enough in your overall emergency fund to cover at least three months of expenses.

Am I financially prepared for the future? Finally, check in on your retirement account balances—whether that’s a 401(k), IRA or other tax-advantaged account. Are you maxing out your contributions? (That’s $18,000 this year for a 401(k) and $5,500 for an IRA, if you’re under 50.)

If you already dedicated 70 percent of your refund to paying off debt, carve out an extra 20 percent to funnel toward your savings and/or investments. If you’re debt-free but your savings accounts could use some love, allocate 45 percent to each—your savings and your retirement or other investment accounts.

Then Live a Little!

No matter how you’ve split your money so far, you’ve got at least $100 left… to splurge! (If you were debt-free and all your savings goals were on track, Draughan says feel free to indulge a little more.) That may not feel like a lot—it’s just enough for a nice dinner, massage or new outfit—but, as Draughan points out: “Splurging can encourage and motivate you to continue on with your financial plan.”

The Payoff

Having a clear plan to make the most of your refund gives that money a defined purpose. And getting in the habit of making strategic decisions with your money, even with freebie funds you weren’t expecting, reinforces smart financial behavior that will continue to serve you well over the long run.

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