5 Wise Ways to Spend Your Tax Refund

by Connie Mei · 9 comments

We are right in the midst of tax season. Even though you may be feeling overwhelmed, frustrated, and just completely stressed out due to your taxes, there is a silver lining. Many of us will be receiving a tax refund this year. According to the IRS, refunds were issued for 83% of the tax returns received as of February and the average refund was $3,120. That’s quite a substantial sum, but what exactly do you do with the money?

Your tax refund can be the biggest payday of the year for you. Even though you may be tempted to splurge and treat yourself to something fancy, there are smarter ways you can spend your money instead. Here are five wise ways to spend your tax refund this year:

Pay Off Your Debt

Having debt looming over your head is never a good feeling. If you do have extra money to spend, such as a tax refund, consider putting at least a portion of it towards paying off your debt. The faster you pay off your debt, the more money you’ll save. Start with the highest interest debt first, then work your way down your list as you go.

Bulk Up Your Emergency Fund

You’ve probably heard this a million times, but most people need to hear it again – never underestimate the value of having an emergency fund. Accidents happen and unexpected expenses occur. Having an emergency fund ready to go can help put your mind at ease, especially in tough times. Put your tax refund towards bulking up your emergency fund. Generally, it’s a good idea to have at least three months of expenses on hand.

Save Up for Retirement

It’s never too early to start thinking about retirement even if your golden years may be years or even decades away. The earlier you start saving for retirement, the more money you’ll have later on. Consider putting your tax refund towards a retirement account, like an IRA.

Upgrade Your Home

Home maintenance and repairs can sometimes fall to the bottom of our list, especially with all the other expenses we have in our lives. But if you have money to spare, it’s a good idea to put it towards upgrading your home. First, it helps with your property value, if you own and want to sell in the future. Second, it can also help you save money in the long run. For instance, replacing your old appliances with energy efficient ones will cut down your utility bills significantly.

Invest in Yourself

Lastly, regardless of your financial situation, it’s always a good idea to invest in yourself. Think about it this way: how can you use this money towards bettering yourself? Perhaps there’s a class you’ve always wanted to take to improve your skills. Or there’s somewhere you’ve always wanted to go. Life is about experiences so don’t be afraid to spend on them.

How are you planning on spending your tax refund?

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  • Joe @ EducationMakesCents says:

    Cyrus good call out buddy but everyone’s case will be different. Some prefer the lump sum to pay down debts. Some would prefer more money in their pocket each month. That is completely based on individual needs. I would prefer the lump sum at the beginning of each year. I can use it to rebuild a diminished emergency fund. Pay off a nagging debt. Pay for continuing education courses. Pay to start a business. The problem with receiving $250.00 per month for me is that I will spend an extra $250.00 per month. Not one garbage. More than likely on food because my food budget will increase. I am a family of 5 living on a 550 dollar monthly food budget. One is a baby! This includes diapers and formula. I would prefer to keep to my strict budget.

    Each individuals unique situation has to be considered. Some financial planning such as weighing the trade offs and the opportunity costs would be a great start. Then a debt snowball. Lots to consider. Great response!

    • David Ning says:

      Congrats on the baby Joe! $550 is a good goal to shoot for with a family of 5, especially when it includes diapers and formula.

      It really comes down to personal preference. THe key is to know what works for you. Personal finance is what YOU do to benefit YOU after all.

  • Cyrus says:

    While this article provides some good, if not obvious, alternatives to spending your tax refund, it misses the larger and more important personal finance message: You shouldn’t be getting a tax refund at all! It’s not an extra “payday” as the author put it. A tax refund means you loaned the government money all year interest-free and now they are giving it back to you in a lump sum. This money should be part of your normal monthly budget instead.

    Adjust your withholding at work so less money gets withdrawn from your paycheck. For example, if your refund last year was $3000 and little has changed this year in terms of dependents, tax bracket, etc., that means you need an extra $250 a month added to your take-home pay. I don’t know about you, but I’d much rather get a $250 bump in my monthly cashflow than one $3000 check that’s so tempting to spend that we “need” articles like this one to help decide what to do instead.

    • David Ning says:

      You are right Cyrus. I actually think we’ve written about adjusting the withholding via the W4 form before. But with interest rate so low, it’s helpful for some people if they are forced to live on the reduced cash flow. The bigger withholding can act as forced savings. Sure they might spend a bit of that lump sum when they receive a big tax refund, but they might spend the whole paycheck too.

      Different strokes for different folks.

    • AJ says:

      Agreed! However, the people I’ve encouraged to do this understand the free interest loan to Uncle Sam but know themselves and do not have the discipline.

  • Joe Serviss says:

    Excellent article. Sound advice. Paying off your debt, and not creating new debt. This is a great way to take a chunk out that weight that is resting comfortably on your shoulders. Debt paid. Excellent. Emergency Fund is probably the best overall option if one isn’t already in place. Car broke down? Hot Water Heater, or Furnace broken? This is a great way to be prepared for an “Emergency.” Pizza is not an emergency, just a reminder. Never too early to save for retirement, or take a class that might improve your overall marketability. This could lead to more money or a higher ranking career.

    • David Ning says:

      Pizza can sometimes BE…. j/k.

      Good suggestion on taking a class. Improving your communication skills is another that can pay dividends not just in your career but your overall social health.

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