It’s that time of year again when you might start thinking about what to do with your tax refund. Whether it’s a few hundred dollars or a few thousand, it’s always nice to come into a sum of extra money. Of course, your refund isn’t really extra money; it’s your hard-earned cash—just the government giving you some of your earnings back because you paid more than you owed in taxes over the course of the previous year.
Many people gravitate toward the idea of splurging on a bigger-ticket item they’ve been needing or wanting. If it’s something you truly need, like a new appliance to replace one that’s just not working well anymore, then maybe that’s the way to go. And we’re not going to tell you that you shouldn’t treat yourself to a luxury purchase if that’s what your heart is set on. You probably don’t want to be told in black-and-white terms what to do with your tax refund.
But, as financial advisers, we will offer some thoughts about wise ways to spend or invest the money you receive back after filing your taxes. Mull them over and decide which is best for your situation and goals.
Smart Ways to Use Your Tax Refund
- Start or add to an emergency savings fund. Having an adequate emergency savings fund is one of the pillars of financial security. In general, establishing emergency savings should be everyone’s first financial goal. So, if you don’t have enough stashed away to cover between three to six months’ worth of total living expenses, it’s an excellent idea to put your tax refund towards this purpose.
- Pay off bad debt. If you already have a solid emergency savings fund and also have debt like credit card or personal loan balances, it’s a good move to apply your tax refund toward paying it off or down. Paying off credit cards and other high-interest debt is generally advisable before creating additional savings beyond an emergency fund or investing. That’s because you won’t earn more through a savings account or investment vehicles than you accumulate in interest on your debt.
- Get started with investing. If you have an emergency fund and aren’t saddled with debt, but you also haven’t really started investing, this would be a beneficial use for your tax refund. Take a look at this information about good ways to start investing, even with a relatively small sum.
- Grow the money with other investments. If you’re looking for other ways to invest your tax refund but aren’t an experienced investor, there are plenty of other relatively safe and simple options. For example, consider putting your tax refund cash into CDs, mutual funds, or bonds.
- Put it toward your retirement savings. Another smart investment option is to use your tax refund to start or add to a retirement account. You might open or contribute to a traditional or Roth IRA, for instance.
- Invest in a new source of revenue. If you’ve been thinking about starting a side hustle or cultivating some passive income, this could be an excellent answer for what to do with your tax refund. Buy supplies, build a website, hire a ghostwriter for that book you want to sell, etc.
- Improve your life. Or, use the money to invest in yourself. Maybe it’s time to buy that treadmill or bike you’ve often thought about. Maybe you’re long overdue for a weekend getaway with your partner. Maybe you should finally get those braces and improve your self-confidence. Maybe enroll in some courses for professional development or to get that degree.
- Give to charity. If you’re in a financial position to give away your tax refund, this is a rewarding option. You’ll help others and contribute to a cause you believe in, and can gain some tax benefits too. Here’s some more information about personal charitable donations.