7 Better Ways to Use Your Tax Refund Instead of Spending It

by Connie Mei · 4 comments

Hopefully by now, you’ve completed and sent off your tax return. While some of us may owe Uncle Sam money, others are getting a nice hefty refund check.

According to the IRS, the average tax refund is $3,120, which is quite a large chunk of money. What’s the best way to handle this lump sum of cash? While you might be tempted to go off on a shopping spree, hold on to your check just a bit longer.

It’s important to think through what you’re going to with your refund. It’s your money and you want to make sure you’re spending, and saving it wisely. Here are 7 smarter uses for your tax refund versus simply spending it.

1. Pay Off Debt

Debt is never a pleasant thing to live with, which is why you may want to put your tax refund toward paying down debt balances. Making a large payment at once can not only significantly reduce the amount you owe, but also be a huge motivating factor for continuing to pay off your debt more quickly.

Focus on paying off the highest interest debt first, or the one with the lowest balance, depending on which ever method you prefer. Credit card debt is the kind of debt you don’t want to keep around, so pay those down immediately. Then continue attacking your other debts with extra money each month until you become debt free.

2. Add to Your Emergency Fund

If you don’t have an emergency fund, you should start one now using these funds. You never know what can happen, and your emergency fund can help you prepare for the what-ifs as well as keep you on a better financial path.

With all the expenses you have, it can be hard to contribute to your emergency fund on a regular basis. Consider putting a significant portion of your tax refund away for this purpose.

3. Invest for Retirement

If you don’t have any debt and are in good shape with your emergency fund, consider investing more towards retirement. Even though you may be decades away, it’s never too early to start preparing for retirement. The earlier you start saving, the more money you’ll see in retirement.

A smart place to invest the money is by putting it in a Roth IRA, or if you don’t have one open a new account. The tax benefits you’ll gain will show up on next year’s tax return as a credit or deduction (depending on what you qualify for), and you’ll have started saving for your future. It’s a win-win!

4. Start a Travel Fund

Traveling the world may have seemed impossible, but now with this extra refund money you can start making that dream a reality. Traveling can certainly be costly, but starting a travel fund, and contributing to it on a regular basis, will help you reach your goal.

Open a separate savings account and put a portion of your tax refund towards travel expenses. Even if it’s only a small amount, you can start chipping away at that dream vacation of yours.

5. Put it Toward a Child’s Education

If you have children, or plan to have children, a financial concern is likely how you’re going to pay their college education. It’s expensive, especially if your child ends up going to a private school.

If you can, start putting money aside for their education now. Talk to your financial advisor or CPA as to what route is the best for saving, but a good place to start is with a 529 plan. The years will pass by faster that you expect and pretty soon, you’ll see that first bill for tuition.

6. Spend it On Your Health

You should also set aside some of the tax refund for yourself. You work hard and, after all, it’s your money so enjoy it a little bit. Try to spend it on something that’s fun but also beneficial, like a dance class or a new bike.

You could also invest in a housekeeper or babysitter so you can regain some mental health and relaxation time. Either way you’ll have a great time, all while investing in your health.

7. Donate to Charity

You absolutely aren’t obligated to donate to charity, but it’s always nice to think of others. Giving to charity may be tough with your regular paycheck. So if you have anything left over with your tax refund, consider donating some of it to a cause of your choice. It will be put into good use and deeply appreciated, on top of being a tax deduction for next year.

Now that you know how to wisely save your tax refund instead of mindlessly spending it, you just have to wait for it to arrive. It generally takes the IRS about 21 days to send your refund so be on the lookout!

Have you received your refund yet? How are you planning to wisely save or invest it?

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  • Donna Carpenter says:

    I use my income tax money for things I can’t normally afford otherwise. The way I look, at it is this: It’s money I have worked my butt off all year long and I can and will spend it how i like, and nobody CAN AND WILL TELL ME HOW AND WHERE TO SPEND IT AT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • Ryan says:

    You don’t get to claim credits and deductions with Roth IRA

  • Mike Carlson says:

    I learned from this article about these 7 Better Ways to Use Your Tax Refund Instead of Spending It. It’s really a great post. Thanks.

  • The Professor says:

    Couldn’t agree more. All 7 of these are much better options than how most people use their refunds (e.g., fancy clothes and tech gadgets).

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