5 Smart Ways to Spend Your Tax Refund

Tax Refunds Money jar with coins on atlas labelled "Let's Have An Adventure"

If you’re expecting a tax refund or yours has recently been deposited into your bank account, you may be wondering what is the best way to spend the money. While you can use your tax refund in myriad of different ways, there are a few that can boost your net worth.

Pay Down Debt

With the average credit card debt per American household of over $5,000, getting rid of this usually high interest problem should be a priority. If you’re carrying balances on multiple cards, you have two ways you can tackle this:

  • You can go over the smaller balances first. If your refund is big enough, this method can give you a psychological boost as you cross off a debt.
  • You can put your refund towards the highest interest. This is strictly a better financial choice if you’re hoping to make a bigger impact on your budget.

But credit cards aren’t the only debt you can tackle. For some families getting rid of their car loan is a huge stress reliever as they have more wiggle room in their money budget. That buffer money can be used for other financial goals or can be split to save and to have some fun with.

Build Your Savings

If you don’t have at least one month’s worth of expenses, you should seriously consider using your tax refund to start or boost your emergency funds. Should anything unexpected come up (like a car repair or medical expenses) having savings around can help you ride it out without busting your budget.

We boosted our savings when we found out we were becoming parents. It allowed us to focus on enjoying our little one without stressing over our family’s finances.

If you plan on making a big purchase like buying a car, house, or starting a business, seeding your saving can be a smart move and help your reach your goals sooner.

Invest in Your Future

If your current finances are on solid grounds, then you may want to go ahead and invest that money. It would be an easy way to bump up retirement savings. Maxing out your IRA contributions can be an incredibly smart move that your future self would thank you for.

Parents may also want to use that money to build their children’s college funds. That 529 can then grow to hopefully cover future educational expenses.

In line with giving, you can also invest in your community and beyond, by donating towards a cause that is dear to you.

Have Some Fun

Don’t feel bad if you set a portion of your tax refund for something fun. Go ahead and plan out that vacation or explore a hobby that you always wanted to get into. It can enrich your life and be a smart move for your money.

Plan Ahead for Next Year’s Taxes

If you received an unexpected promotion, bonus, or your new side business has taken off it may help you to put aside some of your tax refund to pay estimated taxes.  In general, if you expect to owe $1,000 or more you are expected to pay quarterly estimated taxes.

Thoughts on Tax Refund Plans

How many of you are expecting a tax refund? How do you plan on spending it?


Comments (4) Leave your comment

  1. Definitely going to save it.

    I have $86K in student loans still, and my ~$1K refund would make a decent dent in one of the higher APR loans, so that is incredibly alluring. On the other hand, I get a significant amount of anxiety due to workplace dysfunction but feel trapped thanks to severe depression. So I’m trying to put 2-3 months of expenses into savings (roughly $6K, which includes payments for student loans) and am hoping that having this cushion will decrease my anxiety/stress tremendously.

    The theory is that if I have the ability to quit at a moment’s notice, the problems shouldn’t bother me as much. With my refund I’ll be 1/3 of the way to my goal.

  2. We are wedding planning. Our refunds are being combined to go toward that but we are also saving some so we have flexibility to put towards bills and savings. It doesn’t make sense to spend the entire thing for one day. We can plan for a better future this way.

  3. We’re a military family without a lot of credit card debt. More than half of our refund is being put toward starting our own small business, about a third is going toward paying off the balance on our car, which is our second largest debt (I have student loans). What is left well be split between savings and buying household necessities. Paying off our car frees up an appreciable amount of our monthly income, and we are actually excited about that!

  4. Great article!

    Paying down debt is a great option. And for folks thinking about buying a home in the future, using your tax return to save for the down payment and closing costs is another option.

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