Admit it.
Tax refunds are tempting.
After all, it’s probably the biggest check you get all year.
But before you waste it on a new phone or shopping trip, ask yourself:
What’s the best way to make that money count?
Here’s our list of 10 smart ways to use your tax refund this year.
Ready?
1 | Create Your Emergency Fund
The best tax refund advice I can give you comes down to this:
Use it to build a starter emergency fund of $1,000.
Because here’s the deal:
Your emergency fund is your barrier against new debt.
Sh-t happens.
So the next time a tire blows out or a medical expense pops up, you won’t have to borrow money.
And once you save up $1,000 in your emergency fund, then you can shift your focus to paying off debt.
It’s your first step towards financial success.
2 | Get Ahead
Getting a month ahead on your bills feels amazing.
Just think about it:
You’re creating an even larger nest egg for yourself.
So the goal is to pay all of May’s bills with the income from April.
Like your emergency fund, this is also about protecting yourself from the inevitable.
What happens if you lost your job tomorrow?
Don’t let one emergency cripple your financial life.
But if your refund isn’t enough to pay ahead all at once, then try this:
Start with your smallest “essential” bill and work your way up.
Maybe you start with pre-paying your water bill this month, then next month you cover your electric bill.
Keep it going until you’re paying all your bills in advance.
You’ll be glad you did.
3 | Contribute Towards Retirement
Retirement seems so far away, doesn’t it?
But, it’s not.
Ask any older person you know and they’ll tell you that 25 years passes in the blink of an eye.
So what’s the bottom line?
When you reach retirement, either you’ll have enough money saved to live comfortably or you won’t – and wish that you had.
But don’t just take my word for it.
In one research study, older people were asked to share one piece of advice with young people.
A whopping majority of them said:
Save for the future.
That answer triumphed over everything else – including:
- Finding work you love
- Being responsible for your own life
- Furthering your education.
So when it comes to figuring out what to do with your tax refund, investing into your retirement is a smart move.
Plus, thanks to the power of compound interest, adding your tax refund to your retirement can make a massive difference.
And if you don’t know where to begin with your retirement, then I recommend starting here.
Reading that might be the best investment you put in yourself all year.
4 | Attack Debt
You knew this one was coming, didn’t you?
Between student loans, credit cards, and car payments – debt adds up quickly.
And there are two popular debt payoff methods:
1. Debt Snowball Method
2. Debt Avalanche Method
Are you ready to become debt-free?
Both of those methods get the job done.
But whichever one you pick, just make sure you stick with it.
And another thing:
When it comes to debt, lenders make a ton off the interest they charge you.
So even if you can’t afford to pay off your debt completely, don’t just settle for a high-interest rate.
You have two options:
1) Call your lender and try to negotiate a better rate or
2) Use a company like Credible to lower your rate for you.
You’ll save yourself hundreds – if not thousands – by doing this step alone. And according to their research, Credible users save an average of $18,886 over the life of their loan.
The best part?
A lower interest rate comes with a lower monthly payment.
If you’re interested in Credible, we talk more about them in our Credible review.
5 | Improve Your Marketability
You might be thinking about investing your tax refund.
My advice?
Invest in your future.
Here’s the thing:
Your tax refund won’t be enough to cover a college degree. But, you can still use it to earn a certificate, new skill, or even move to a place with better opportunities.
Besides:
A pay increase will be worth much more than the value of your refund today.
Making your tax refund work for your future is what excellent money management is all about.
I once heard a successful person say:
“I like to spend money on things that will make me money.”
How powerful is that?
This is more than just learning what to do with your tax refund – it’s about investing in yourself.
So listen:
On average, certificates (issued by a nongovernmental agency) can increase your paycheck by as much as $324 weekly, according to the U.S. Bureau of Labor Statistics.
Licenses from government agencies can increase your paycheck by an average of $261 weekly.
So if you’ve been thinking about developing a new skill or getting a degree, then this could be your start.
6 | Be Good to Your Car & Home
Let’s be honest.
It seems like something always needs to get repaired or replaced.
So have you been putting off car or home repairs because you didn’t have the money?
If so, consider spending your tax refund on costly, but important, repairs to your house or car.
Replace old tires while you have the money.
Or fix a leaky roof while you have the chance.
There’s no place like home, and your house is your biggest asset.
So keep it that way.
Plus, you might find that money spent now will save you more in the long-run.
Think about it:
If something goes unnoticed or isn’t repaired, it can become a huge burden.
Bigger problem = more expensive.
Plus, improvements can lead to more equity.
The bottom line?
Given the price people pay for their homes, being proactive about keeping it in good condition is always smart.
7 | Pay it Forward
It feels good to do good.
So is there a cause that’s close to your heart?
One important aspect of good money management is helping others.
Because the older you get, the more you realize life isn’t about you and only you.
So when you’re figuring out what to do with your tax refund, consider donating a portion of it.
And if you do choose to pay it forward, then make sure you save your receipts.
Those receipts will give you the proper documentation for the next tax season. You’ll be able to itemize your deductions when you file your next return.
(This is what people mean when they talk about making a tax-deductible donation)
8 | Save for a Down Payment or Pay Down Your Mortgage
If you know you’ll be in the market for a new home, then saving for a down payment is always a smart idea.
Why? Because having 20% saved prevents you from wasting money on Private Mortgage Insurance (PMI).
PMI is expensive. (As much as 1% of the value of the house).
So on a $250,000 home, that would be over $200/month.
Ouch.
Here’s the deal:
PMI is what’s used to protect the lender in the case of default.
And guess what?
It isn’t always refundable.
So it makes sense from the lender’s perspective, but it’s a waste of money for you.
But if you’re not planning on buying a new home, then pay down your mortgage instead.
Interest is charged on the principal balance, which is highest at the start of repayment.
As you make payments on the loan, the principal decreases. This means the new interest that accrues between payments also decreases.
So more of each payment will be applied to the principal balance.
Imagine this:
If you spent your tax refund on making a principal payment each year, you could save yourself years of payments.
9 | Invest
Want to know how to become wealthy?
Start with one tax refund at a time.
If you invest your money and let it grow, you’ll be on your way to becoming an everyday millionaire.
The average refund amount is about $2,895.
If you invested that amount every year, for 10 years, with an average rate of return at 10%, you’d have $51,887.
If you just saved that amount for 10 years, then you’d only have $28,000.
By investing, you’ve almost doubled your money.
So maybe now is the time to start investing your tax refund.
Online stock brokers (TD Ameritrade, Fidelity, E*TRADE) are great places to start because they’re affordable for small investors.
You’re wondering what to do with your tax refund. So why not get on the path to securing your future?
10 | Start a Vacation Sinking Fund
Wanna go on vacation?
There’s no reason why you can’t use a responsible amount of your tax refund to have fun.
(Emphasis on a responsible amount)
Is there an experience you want to try or a memory you want to create?
If your tax refund won’t cover the cost entirely, then create a vacation sinking fund.
Sinking funds are great at preventing unnecessary credit card charges.
For example, the average vacation costs $1,145 per person. This means a family of 4 would need $4,580.
If you put that on a card, it could mean that you’ll be paying it off for several months after you’ve gotten home.
So here’s a good rule of thumb:
If it will take you longer to pay off the item than the use you’ll get from it, then it’s a terrible deal.
Hopefully this helped you learn how to use your tax refund wisely.
Thanks for reading.
