Apr 3, 2023
There are only two certainties in life: Death and taxes. Everything else is uncertain
After you’ve made it through tax season -- filing your taxes and the hair-raising paperwork-gathering it entails -- what will you do with the big fat tax return check Uncle Sam sends you? True, it might not be that big or that fat but a tax return of even a few hundred dollars is always a joy to receive. Still though, what will you do with it? If you're uncertain, read on.
There are lots of ways to spend your tax refund wisely...
You work hard for your money and however much of it you get back in your tax refund you should spend wisely. You can pay down debt. Start or grow an emergency fund. Fund your retirement account. Put money in the stock market. Buy the life insurance or health insurance you’ve been putting off. Make the home or car repairs that keep you up at night. Make an extra mortgage or student loan payment. And if you're carrying private student loans, making an extra payment is smart as these tend to carry higher interest rates.
And others that maybe aren't so smart
What you don’t want to do is spend your tax return money on something unnecessary or on something that really could wait. Like a shopping spree, or the latest video game or gaming system. A tattoo. The hiking boots you’ve had your eye on.
Purchases like those can come later. (Or you can ask others to get them for you for your birthday, rather than spending your own hard earned money on them!)
The thing to do with your tax refund is to invest it, start a college fund, use it as seed money to start a small business, pay for classes, continuing education, and other education expenses that will improve your future self.
The point is to spend your tax refund on something of consequence. Something that will make a real difference in your life and future.
Here are 10 smart things to consider doing with your tax refund
1. Pay down debt
There isn’t a person on the planet who likes thinking about how much credit card debt or other debt they might be carrying, so this is probably going to be your least favorite option on this list.
But, as long as you’re carrying credit card debt or student loans, the income you bring in each month is compromised. A chunk of it always has to go toward the credit card that’s gotten out of hand or to pay off the designed bag you maybe shouldn’t have bought. Or maybe it’s a student loan that’s looming over your head. Or even medical bills that are so high the thought of them makes you sicker than whatever caused you to have them in the first place.
One of the best things you can do with your tax refund is to pay down debt, especially credit card debt
The less you owe, the better your credit score will be, and the better the odds you’ll be approved for the mortgage on the house or car you'd like to buy. Or, maybe even more important, the less you owe the better you’ll sleep. That sounds like a good reason to use your tax refund to pay down debt, particularly high interest debt.
How best to approach paying down debt? There are two tried and true strategies:
The snowball strategy:
This is when you pay down your debts from the smallest to the largest. The thinking is that by getting rid of the smaller debts first, you’ll see and feel good about your progress, and gain momentum toward paying off the larger amounts.
The avalanche strategy:
This is when you pay down those debts with the highest interest rates first. Doing so prevents you from paying more interest down the road.
2. Fund your retirement plan
If you have a retirement account, one of the smartest things you can do with your tax refund is to put the money in it. At present, you can use your tax refund to fund a traditional or Roth IRA up to $6,500 a year. This permits your money to grow tax-free. Just don’t take it out before age 59 and a half. You’ll pay a 10% penalty, plus income taxes on it.
At some point down the line, you’re going to need a retirement fund. If you don’t have one, now is the time to take advantage of your company’s 401k if they offer one or look into some investment advisory services to assist you in determining your best options.
3. Buy life insurance coverage
Most of us like the idea of buying life insurance coverage about as much as we like the idea of paying down debt.
Buying life insurance requires facing our own mortality to a degree, and not many of us are too keen on that. There’s also the concern about the money involved. “Life insurance is too costly,” some say. No. What’s costly is not having any if, Heaven forbid, you suddenly pass away.
Life insurance is essential to protecting those we leave behind, so it’s smart to consider using your refund to purchase a policy sooner than later.
The process is far easier than it used to be (you can do it all online almost 100% of the time), and the policy prices may surprise you.
4. Start an emergency fund
With the economy as it is, it’s never been more important to have an emergency fund, a stash of 6-12 months’ worth of living expenses that you don’t touch unless you absolutely must.
You could find yourself out of work or faced with a large, unexpected expense. With this in place, you'll have extra spending money on hand, and you won’t have to put your living expenses on credit cards, which means you’ll escape the debt that comes from using them that could compromise your financial future.
It might not be fun to use your tax return money to start building an emergency fund, but should you find yourself unemployed or faced with a huge expense at some point you’ll be thankful you did.
If you choose to start an emergency fund, consider putting it high-yield savings accounts, CDs, or money market accounts.
You have a few options for where to store your emergency fund
You could go with putting money into a high-yield savings account or money market accounts. Savings accounts don’t allow you to write checks, but the money market will. Both are worth looking into.
5. Make an extra payment on your mortgage, student loan, or car loan
Again, it’s all about managing debt and freeing up more money for other things we need or want.
If you’re hoping to own your home or car outright, or if you’d really like to stop having to think about a student loan or student debt, using your tax refund money to make an additional monthly payment makes a lot of sense.
6. Put it away to save for a big purchase
Maybe you’d like to buy a new home or a vacation place. Maybe you’d like to tgo to the islands or Europe with your friends. With the average tax refund at just about $3,000, using your tax refund to kick start saving up for these things and others like them could help you attain them even faster.
As we mentioned earlier, put your tax refund money in a high-yield savings account or money market account so your money grows, and your dreams grow closer to becoming reality.
If you don’t think you’ll need to touch the money from your tax refund any time soon, consider putting it in the stock market or into a CD (certificate of deposit). CDs earn more interest than either of the other two options. Learn more about CDs at Investor.gov.
7. Use it to maintain your car or truck
What costs less: buying a new car or taking car of the one you own? In terms of money and stress, it's better to take care of the one you've got. So, if every light on your dashboard is blinking, use your tax refund for maintenance. And if you’re close to paying your car or truck off, investing in the proper repairs makes all the sense in the world. Who wouldln't love NOT having a car payment?!
8. Give to a cause close to your heart
If you’re in a position to donate some or all of your tax refund to a cause you believe in, kudos to you! Just make sure the entity in question meets the IRS requirements for you to be able to deduct the contribution from your taxes.
9. Invest it in yourself
Maybe you’d like to change careers or learn a new skill that would help you advance in your current one. If so, it might be best to use your tax refund to take classes, attend a conference, or get a particular certification.
All of those things are easier to do than ever before. Thanks to Zoom and online education even conferences can be attended remotely. If you’ve got a phone or laptop and an Internet connection, a career change could be just a click away.
Consider using your tax refund to invest in yourself.
10. Buy something you really need
Does your work require you to have a decent computer, laptop, or smartphone? If so, it’s tough to read and respond to email - or check your bank account to see when that refund arrives! - if your computer is on its last legs or the screen on your cellphone is shattered like someone dropped a bowling ball on it.
If that's the state of your professional essentials, it makes sense to use your refund to invest in replacements.
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