In the late 1960s, Stanford University conducted a now-classic psychology study called the Marshmallow Test.
In it, children were offered a choice between eating one marshmallow immediately or two marshmallows if they could wait a few minutes.
Resisting an immediate reward for a greater one down the road is called delayed gratification. It’s a vital skill to develop when young, as it’s linked to patience, self-discipline, and other traits that can have a big impact on your life and finances.
So keep those marshmallows in mind if Uncle Sam kicks you a refund check this year. While there’s nothing wrong with treating yourself from time to time, there are other money moves you could make now that would be more valuable in the long run.
1. Pay off your debts
Eliminating debt isn’t as glamorous as buying something new, but it can be more satisfying. Even if you can’t wipe out your debt entirely, taking a big chunk out of your balance will shrink the amount of monthly interest you accrue. In other words, paying off debt isn’t just about being responsible now, it’s about saving money in the immediate future.
2. Save (and not just with a traditional savings account)
Your savings account isn’t the only way to grow your money. Certificates offer a guaranteed annual percentage yield (APY) that’s higher than a normal savings account. Terms are fixed (typically between six months and seven years—you decide), with longer certificate lifespans offering better rates. So if you purchased a seven-year certificate for $5,000 at 3.15% APY and added your dividends back into your certificate balance, you would earn $1,228.12 after 7 years.
3. Invest toward retirement
It’s never too early to start saving for retirement, and the sooner you start the better. If you deposit your tax refund directly into an individual retirement account (IRA), it’ll have the chance to grow over the next few decades without you needing to tighten your normal monthly budget. Best of all, traditional IRAs are tax-deferred, so you won’t have to pay for the contribution or any interest you accrue until you withdraw at retirement.
4. Prepare to send your kids to college
The cost of college is only getting higher. If you expect to be part of the financial picture when your kid—or grandkid—takes that big step, a 529 Plan is a way to set aside funds now while enjoying extra benefits from your investment. The money in a 529 Plan won’t be taxed as it accrues interest or when it’s withdrawn to use toward education. And if you live in Oregon, your contributions are tax-deductible on your state filing, up to an annual limit.
5. Improving your home's value
Whether your house needs a fresh coat of paint, double-paned windows, or a new roof, a renovation project not only helps protect your greatest financial asset, it also builds equity in case you decide to move or take out a home equity line of credit. And with tax refunds arriving between March and May, they’ll be just in time to tackle those spring projects.
6. Boost your emergency and rainy day funds
Try not to rely on credit to be your parachute in an emergency or other unexpected need. It’s convenient to fall back on if you have car trouble, an urgent home repair, or a medical expense, but even better is using money you’ve set aside for that specific purpose. Plus, pulling from your rainy day or emergency funds won’t nudge you into debt (see #1).
7. Give to charity
Not all smart investments are about growing your own money. Donating your tax refund can mean a world of difference to your charity of choice. To make your contribution go even further, keep an eye out for charities with matching gift programs. That way, your chosen cause will receive double (or more than) what you give.
A tax refund is your annual chance to get a lump sum of money outside of your normal budget. However you decide to use it, make the most of it!