It’s tax refund season! Are you ready to head out to your CPA or click on TurboTax to file your taxes with the IRS? Are you expecting a refund and you’re not quite sure what the best money “move” to make is? Then this article is just for you!
There are several things you can do with your tax refund that will help you maximize your financial health, grow your wealth, and provide security for your family. Let’s dive into 7 smart things to do with your tax refund.
Here Are 7 Smart Things To Do With Your Tax Refund:
1. Save your tax refund in a rainy day fund
Did you know that the average American cannot take on a $1,000 emergency? Just 40% of Americans could actually pay, in cash, for a $1,000 unexpected expense. That means that anything “out of the blue” could, statistically, put you in more debt. That’s why, the number one smart thing to do with your tax refund is to put it in a high yield savings account.
Why a high yield savings account? It sounds complicated, but a high yield savings account is typically an online savings account that offers a higher annual percentage yield, or interest rate, on your savings. A traditional brick and mortar bank, like Wells Fargo or Bank of America, offers an average of 0.06%, whereas a bank like Ally offers a savings account with a 0.60% interest rate. It’s not too difficult to see why I recommend putting your tax refund in a high yield savings account over a “normal” savings account.
Saving for a rainy day doesn’t just come with the side effect of peace of mind. It helps ensure that you can shield yourself from the unexpected.
Don’t swipe your credit card, take out a personal bank loan, or be put in the awkward position of having to ask a family member for a loan when something goes awry. When you put your tax refund into a savings account, you’ll be covered for whatever comes your way.
2. Use your tax refund to pay off debt if your interest rate doesn’t exceed 7%
I don’t think it’s a wild accusation to say that most people get their tax refund and use it for things to treat themselves first. We’ll go over that option in a bit, however, the important thing to note is that in the Easy Budget world, paying off debt is prioritized above treating yourself when it comes to smart things to do with your tax refund.
If you have high interest debt, like an 18% APR store credit card, use your tax refund to wipe that debt out.
But why pay off debt with your tax refund on debt with over 7% interest and not under 7% interest too? Great question! I suggest using your tax refund to pay off debt if your interest rate on that debt is above 7% because if you invest your money in the stock market via a retirement account, like a 401k or a Roth IRA, you will make more of a return on that money than if you paid off debt lower than 7%
So if you have debt, let’s say a car loan, with an interest rate of 4.65%, I suggest investing money into a retirement account because the average return on money in a retirement account is 7-10% — way more than the 4.65% you’re paying in interest on your car note.
When you have a tax refund, the smart thing to do as far as debt payoff is concerned, is to get rid of as much high interest debt as you can so that you can start making money instead of paying money to interest!
3. Invest your tax refund in a Roth IRA
A Roth IRA is a tax advantaged investment retirement account. That means that the money you put into your Roth IRA is taxed when you put it into the account, but not when you withdraw from it. This protects you from higher tax fees in the future when you take your Roth IRA contributions out of the account upon retirement. It’s important to note that the maximum contributions you can make to your Roth IRA account is $6,000 per year. So you have a limited amount of money to contribute each year to take advantage of this taxed-later account.
If you have your fully funded emergency fund and you’ve paid off all of your high interest date, or more ideally, all of your debt (excluding your mortgage), then the next best smart thing to do with your tax refund is chuck it into your Roth IRA retirement account.
As we noted above, the average return on your Roth IRA account is historically between 7-10%. So, placing your tax refund into this tax advantage account and maxing this account out each year is one of the best things you can do annually to set yourself up for wealth building success.
4. Fund your Christmas sinking fund with your tax refund
Although the holidays come around each year like clockwork, they still manage to take some people by surprise. Listen, I get it — you’re busy and sometimes that Christmas sinking fund doesn’t quite make it into your memory or your budget. A smart thing to do with your tax refund is to put it in a separate savings account or cash envelope specifically for Christmas.
Imagine having your entire holiday season paid for in April!? That can be you! The average person spends a little more than $1,000 on Christmas gifts, events, and travel. That’s not pocket change.
Set yourself up for success this holiday season by thinking ahead and using your tax refund to fund the most wonderful time of the year.
5. Use your tax refund to pay for upcoming family needs
Your priorities for your tax refund may not include Christmas gifts and ice skating in the earlier part of the year and that’s ok! The smart thing to do with your tax refund in that instance would be to use it on things your family needs right now or in the near future. What kinds of things? Think:
- Car maintenance
- Yearly manufacturer recommended maintenance
- New or new-to-you tires
- Car Registration + License feeds
- Oil change, tire rotation, etc.
- Braces and/or invisalign
- Down payment on a new home
- House maintenance
- HVAC repair or replacement
- Roofing repair or replacement
- Painting and/or Remodeling
- Property taxes
- Tree removal – for those pesky Hurricanes in the South
- New (or new-to-you) furniture
- Savings for a new (or new-to-you) car
- Vacation fund
Your family’s needs are not going to look the same as the family beside you. You could be saving for a large purchase like a new home or a new-to-you car. Whether you’re using your tax refund for big-ticket items or simple family needs, using your tax refund for any one of these items is the smart way to go!
6. Give your tax refund to an organization that you can get behind
If you have a fully funded emergency fund, you’ve paid off all of your debt, you’ve maxed out your Roth IRA and you have all of your family’s needs taken care of, consider contributing to an organization that you 100% believe in. Nonprofits are always looking for funding and one of the best things about donating is that it’s a tax write-off.
Of course, that should never be the #1 reason you give to a cause, but I won’t lie and say it’s not a perk. A few recommendations when giving to a charity are to consider your local organizations before national ones and to look up how the organization truly operates. The worst thing is giving to a cause every year only to find out that 2% of the donations go to actually helping what you wanted to help with. A few of my favorite charities are:
- American Cancer Society
- American Civil Liberties Union (ACLU)
- American Society for the Prevention of Cruelty to Animals (ASPCA)
- Disabled American Veterans (DAV)
- Feeding America
- Local Humane Society
- Local homeless shelters
- US Forest Service
7. Treat yourself with your tax refund
I told you that we’d get to splurging on yourself! There should be no shame in buying something or an experience for yourself if you have your financial house in order.
There is also no shame in spending a little money on yourself while doing other items on this list. This isn’t a zero-sum list, afterall. If you’ve been working really hard on your finances and things are going great, rewarding yourself for all of the hard work you have done isn’t a bad idea. You are allowed to use your money to buy things or experiences that make you happy. Otherwise, what’s the point of all of having money?
Some of my favorite “Treat ‘Yo Self” items include getting my nails done, having a massage, staying in an AirBNB for the weekend or buying a new outfit. The sky’s the limit, but don’t let anyone tell you that you’re not smart for doing this, because one of the smartest things you can do with your tax refund is treat yourself.
There are multiple ways in which you can spend your tax refund. Instead of blowing all of your money in one place or haphazardly spending your refund on frivolous items, be more intentional and strategic about how you spend it. Any one of these 7 smart things to do with your tax refund will propel you to reaching your financial goals faster!