Everybody’s hoping for a big fat tax refund right now — but there are more than a few different options on what you can do with that refund when you actually get it. Deciding just what you’re going to do with your tax refund can be worth a little more thought right now than in years past.

Paying Down Debt Versus Emergency Savings

Most of the I’ve talked to are pretty bent on using their tax refunds to pay down as much debt as possible this year. I think that is a good choice — but I don’t think it is quite as simple as it might have been last year. The decision on whether to concentrate on paying down debt should be based on your emergency fund: as credit card companies reduce balances and are more reluctant to open new accounts, it’s much harder to depend on credit to cover emergency expenses. Having an emergency fund in place can also help you avoid taking on more credit card debt. If your rainy day savings aren’t really enough to make you feel secure, a better use of your tax refund might be buying a little peace of mind and depositing it in your emergency savings.

Which Debts Should Get Paid First?

Reducing debt as quickly as possible should still be a high priority for using your tax refund, as long as you’ve already got some savings you can fall back on. But narrowing down just which of your debts can be a bit complex. I’ve said in the past that putting personal loans at the top of your repayment plan may not make financial sense but it can be the best option for keeping healthy relationships. But when you have some spare cash — like a tax refund or a windfall, it’s not necessarily worth your while to accelerate paying down those personal debts. As long as you’re keeping up comfortably with the repayment schedule set for a personal loan, it’s okay to put your tax refund towards your balance with the highest interest rate.

If it feels like using your tax refund all towards one big balance doesn’t feel like you’re really making any progress in paying down debt, there is an alternative. You can use it towards your smallest balance — even if you can’t eliminate that balance entirely, you can get a pretty good feeling about your progress. You might not get quite as far ahead on interest, but paying off a balance can give you the momentum to keep going on your other balances.

Do Something Fun

While it’s probably not the best plan to use your entire tax refund towards fun (unless your finances are really in order), it’s perfectly okay to take a few dollars and put it towards fun. A dinner out isn’t likely to make a huge difference in your debt repayment schedule and it can serve as a reminder on why you want to get on a better financial footing.

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