5 Smart Ways To Spend Your Tax Refund
You finally got your tax returns filed! It was a difficult battle filled with spreadsheets and incomprehensible papers bloated with questions that seem almost philosophical in nature.
“Was that freelance work similar to the work you do for your day job?” Who’s to say? Isn’t all work similar in a sense?
But you have overcome and now gained your reward: the tax refund! (Or you had to pay additional taxes but that’s not what this post is about, sorry!)
Obviously, there are infinite fun ways to spend your tax refund, but only five ways to spend it wisely. Or, at least, only five smart ways that are in this article. Read on and learn how you can throw around those refunds responsibly!
Pay off that debt!
It might seem obvious, but one of the smartest ways you can spend your refund is to pay down your debt, credit card or otherwise. Being in debt is a weight on your credit score, and it can impact your ability to get auto loans, home loans, or any sort of loan.
The sooner you pay off that debt, the less interest you’ll have to pay on it. So paying off your debt doesn’t only benefit you now, but it guarantees you’ll get to hold on to more of your money in the future (especially if you’re dealing with a predatory payday loan). And there are few things more valuable than peace of mind.
As Phil Risher, founder of the Young Adult Survival Guide (@yasurvivalguide), told us: “Spend your tax return paying down consumer debt. I recommend to my readers to use any extra money on paying off debt (student loans, credit cards, etc.) The reason I recommend this is because getting out of debt is a foolproof way to living a worry free life. When you can spend your money on something that will alleviate stress in your life, I think it is well spent.”
Jamie Jeffers, creator of the Medium Sized Family blog (@MediumSizedFam), agrees. “If you have debt, especially credit card debt, use your tax refund to pay that off first. Interest rates are on the rise, and there’s no better time to get away from paying high interest rates than right now.”
Start an emergency fund.
Don’t have an emergency fund? Start one! Already have an emergency fund? Add to it!
There are all sorts of unexpected disasters that can occur, from car maintenance issues to health problems. And all of them are very expensive and can leave you in a deep financial hole if you don’t have an emergency fund.
Risher says, “Spend your tax refund on bolstering an emergency fund. If you do not have an emergency fund in place, I would stash away at least $1,000 in case of tough times. Having the security that you are good with $1,000 in the bank just in case can help you get on a healthy financial journey.”
For more information on dealing with bad surprises, check out our article on medical emergencies.
Jumpstart those savings.
“If you are out of debt and have an emergency fund established, another smart way to use this money is to establish short-term savings,” Jeffers told us. “Consider any expenses you anticipate this year, from insurance bills to home repairs, to braces for the kids. Set aside enough money to cover these expenses now so you aren’t caught off guard when the bill comes later.”
If you think you have the essentials covered, you can also consider saving up for something a bit more fun. Because you deserve fun! For example, Risher told us that “since I am debt free and have an adequate amount in my emergency fund I used a portion of my return for a trip this summer. There is no right or wrong answer because everyone’s situation and goals are different. However, try and make the most responsible decision now because your future self will thank you.”
Find something deductible.
If you want to get a head start on mastering next year’s tax return, consider using your refund money for something deductible! Maybe you’re looking to make a big, new electronics purchase that you can write off as a business expense—should your work require electronics (and odds are, given that we live in the present, it does).
Charity is also a great way to get more deductions for next year. And it has the bonus of making the world a better place. Find a cause that’s important to you and “refund” a little kindness back into the world.
Spend it throughout the year.
This tip relies on a different definition of the phrase “how you spend your tax refund.” Instead of telling you what you should spend your tax refund on, it’s literally a different method of spending that money.
We’ll let Michael Banks, founder of FortunateInvestor.com (@FortunateInvest), explain: “One of the smartest things you can do with a tax refund is to not get one at all. Instead of giving the government an interest-free loan, adjust your withholding so you’re paying less and let that money work for you instead. With the ‘extra’ money you receive with each paycheck, pay down existing debt (starting with the highest interest rate first), create an emergency fund, or park it in a savings account or investment account so you can earn interest on it throughout the year. You’ll avoid the temptation of spending a large tax return on purchases you don’t really need—like a new car or an extra vacation—and you’ll have more money in the bank for your retirement.”
Filing your taxes can be a pain, but your refund is a nice silver lining. You can learn more about filing taxes in Tax Season 101: An OppLoans Explainer eBook. With these tips, you can stretch that silver lining as far as possible!
Michael Banks is a seasoned finance professional and founder of FortunateInvestor.com. With 20 years of professional experience in the financial services industry, he uses his expertise to turn simple lessons on money into lifelong habits that form the basis for a successful financial future.
Jamie Jeffer is a wife and mother of 5, clawing her way out of credit card debt. She dreams of bottomless coffee and scones that magically appear on her desk where she blogs at Medium Sized Family.
Phil Risher is the founder of YoungAdultSurvivalGuide.com. Phil paid off $30,000 in student loans in 12 months making 48k. After, he saved up and bought his first place with cash at the age of 25. Phil now speaks with college students and young adults around the country about his 5-Step Guide to help them on their financial journey.
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