If you’ve already filed your taxes, you can probably expect your refund soon. Remember, your tax return isn’t free money – it’s money that you’ve earned and the government is giving back to you! According to a 2020 NerdWallet article, “the average taxpayer [was] raking in a refund of roughly $3,000 each of the past several years.” Whether your tax refund is more or less than $3,000, it’s a good idea to make the smartest decisions you can with that money.
While there’s no perfect answer, there are some things that you definitely should do – and some that you should absolutely avoid – with your tax refund money. Take a look at these fourteen ideas for what you can do to make your money work for you!
Build Your Emergency Fund
One of the very first things you should do with your tax return is build up your emergency fund. An emergency fund is exactly what it sounds like: money that you can use if you get into an emergency. The future is unpredictable. You may lose your job, get into a car accident, or need to pay for an unexpected home repair.
Experts suggest that you have 3-6 months of your income saved for these types of emergencies. However, saving that much is impossible for many people – or it takes a long time. Give yourself a boost by starting an emergency fund, or adding to your existing one with your tax refund.
Pay Off Credit Card Debt
We’re constantly bombarded with advertisements for the latest and greatest new fad. When we go ahead and purchase the newest hot item, it may end up on our credit card bill, and it may cost us more than just the listed price (we’re talking interest). But necessary expenses – a trip to the ER or a school fee that you didn’t anticipate – may end up on your credit card bill, too.
If you have credit card debt, getting rid of it should be your top priority. While you may not be able to pay off your entire balance with your tax refund, see if you can make a dent. Experts advise that if you have credit card debt, it’s smarter to pay it down than to invest in your emergency fund. But ultimately, the choice is up to you.
Personally, I would put 50% of my tax return in my emergency fund and 50% towards my credit card debt – but you should do what makes the most sense for you!
Make Necessary Repairs
Stuff breaks: it’s just a part of life. Whether it’s the chain on your bike, a speaker in your living room, the air conditioner in your car, or even a major issue like a flooding basement, there will be things in your life that you just need to fix.
Take your tax return and apply it to something that needs repairing, and prioritize fixing what’s the most important to you – or what will cost you the most if you don’t get it repaired quickly.
Put It In Savings
If you already have an emergency fund, you’ve paid off all your debts, and you don’t need to make any repairs, you may be tempted to just spend your refund on things that you want.
But wait! Remember, this is your hard-earned money. Don’t let it all disappear into Amazon purchases that you don’t actually need. Instead, deposit your tax refund into a savings account. Wait one month. See if you still really want the items you were planning on buying before.
If the answer is still yes, then go ahead and make your purchases. However, remember that if you keep the money in savings, you’ll have access to it if you ever need it.
Make an Extra Student Loan Payment
So many Americans have student loan debt. If you are one of them, consider putting part or all of your tax return towards your student loans. While it’s not fun, paying down your student loans now will help you later. Your future self will thank you!
Buy Something You Want and Something You Need
Are you determined to spend part of your tax return? That might not be a bad idea. According to Summit Credit Union, “the occasional well-deserved splurge can help you stay positive in your pursuit of long-term goals, like saving for a home or paying down debt. The key is to know how much you have to spend (about a third of your total tax return) and not go over your limit.”
Calculate what one-third of your total tax return is and decide how you want to spend it. You may choose to buy something you want and something you need. You could also spend that third on an experience like a meal at a fancy restaurant or tickets to an upcoming concert. There’s only one rule: spend it on something that makes you happy!
Pay Down Your Vehicle
Similar to student loan debt, an auto loan is a recurring expense for many Americans. You know exactly how much that monthly bill will be – so why not use part of your tax return (or all of your tax return) to pay it down?
Again, your future self will thank you if you choose to put some (or all) of your tax refund towards your car payment. Once you pay it off, you’ll have more room in your monthly budget!
Invest In Your Home
You can also invest your tax refund into your home. Whether you think that you may be selling your home sometime in the future or you’re just interested in home improvement, if you’re a homeowner, it’s not a bad idea! Turn your tax return into a new bathroom. Remodel it yourself and hire out the complicated plumbing and wiring to a professional. Or, hire a professional for the whole renovation!
Similarly, you can choose to remodel your kitchen (or part of it), your back patio or deck, a bedroom… there are many possibilities. Choosing to invest your tax return into home improvement will help you increase the value of your home – and help you appreciate spending time at home even more!
Donate to Charity
When you have so much that you don’t know what to do with it all, it’s always a good idea to donate to charity. Research organizations that are in your area if you want to have the greatest impact on your community. You can donate to schools, churches, animal shelters, and plenty of foundations.
You can also donate your tax refund to an organization that is involved in a cause you support even if the organization is not local to you. No matter how you choose to donate your money, remember that it will be a tax-deductible donation and more importantly, that you are helping someone (or possibly many people) in need!
Put It In Retirement
Not sure about what to do with your tax return? Some financial experts suggest turning it into a contribution to your retirement account. Whether you have a traditional IRA, a Roth IRA, or another type of retirement account, when you add your tax return to it, you’re helping make life easier for your future self.
Invest In the Market
Have you always been interested in the stock market but you’ve never had the funds to get started? This could be the year that you start investing. Do your research first, and you may want to work with a financial advisor. However, there are plenty of resources online that can teach you all about the stock market, including our guide to impact investing.
Start a College Savings Plan
Are there any little ones in your life with their whole future ahead of them? When you care deeply about someone, you want them to have all the advantages and opportunities possible.
You can use your tax refund to start or add to a 529 tax-advantaged savings plan for a child (or tween, or teenager) in your life. They can use that fund to help pay for their education. Remember, the earlier you start, the more time the investment has to grow. Make sure you research how 529 plans work in your state before you jump in.
Take a Class
Stuck in a rut? Or have you always wanted to learn something but you’ve never had the extra money to spend on a class? You can use your tax refund to enroll in a class at a local community college, vocational center, or another organization to help you improve your life.
If you’re trying to climb up in your career but you need to learn new skills, use your tax refund to pay for a class that will teach you what you need to know. If you’ve wanted to learn a foreign language but never had the money for a class, use your tax refund to enroll in one now!
Put It In a Travel Fund
Dream vacations may seem like they’re just that, a dream – but that doesn’t have to be true! Instead of spending your tax return, put it in a savings account and set it aside for your dream vacation.
Whether you want to go on a Caribbean cruise, see the Taj Mahal, or explore castles in Europe, putting your tax refund into a travel fund will make it so much easier.
What To Avoid
No matter what you choose to do with your tax refund, there are certain activities you should absolutely avoid.
Don’t take it to the casino and gamble it all away. You also shouldn’t decide to invest it all in the stock market, real estate, or a friend’s new business, without first doing your research. Last but not least, don’t spend it all on minor purchases that you don’t actually need! Instead, make your money work for you!
Read More: Bottom-Up Investing Basics for New Investors