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What to Do with a Tax Refund
In this article I am going to discuss my best suggestions for what to do with a tax refund. Learn 13 awesome tips for what to do with a tax refund to use it to your best advantage! With these 13 fun tips, you can get great ideas for what to do with a tax refund this year!
13 Best Ideas for What to Do with a Tax Refund
If you are looking for what to do with your tax refund, then this article is for you! Here are 13 of the best things you can do with your tax refund.
But before we get to the suggestions for what to do with a tax refund, I do want to make this recommendation: If you regularly get a tax refund of more than $600, then you should change your tax withholding so that you are not giving an interest-free loan to the government! 🙂 I know that most people just see their tax refund as found money, but that is money that you have given to the government to use throughout the year, and you didn’t get any benefit from them using your money!
According to Bankrate, the average tax return for 2018 was $2,899. That means that the average American family allowed the government to use $241.67 a month that they could have kept in their own pocket and used to fund their own awesome financial goals! So let’s not do that!
Again, if you regularly get a large tax refund, don’t just see it as a windfall and blow that money! Adjust your W-2 tax withholding, and then use the money that it saved you each month to reach your own amazing financial goals!
But for this year, here are 13 ideas for what to do with that wonderful tax refund.
1. Build a starter emergency fund.
One of the best things that you can do with a tax refund is to create an emergency fund. If you do not already have a starter emergency fund of at least $1,000 or up to one month’s worth of expenses, then start there. Put your tax refund money in a separate savings account (I like Capital One 360 because it is so easy to set up multiple savings accounts for your various savings goals, and they have been a great bank for us) earmarked for emergencies only, and then don’t touch it unless you have an emergency! Learn what an emergency fund should be used for here.
2. Pay down credit card and other nonmortgage debt.
Another great tip for what to do with a tax refund is to use it to pay off debt.
If your nonmortgage debt is less than the amount of your tax refund, awesome! Pay it all off, and free yourself from that burden! If you do not have enough in your tax refund and other money available to pay off all of your nonmortgage debt at once, then pay off the debt with the highest interest rates first, or else begin and follow a debt snowball plan to wipe out all of your debt as quickly as possible!
3. Finish off funding your emergency savings.
If you have enough money with your tax refund money and maybe even other savings you have available to do so, then fully fund an emergency fund with at least three months’ worth of savings or, ideally if you can, six months’ worth of savings. Or save as much as you can toward that goal using your tax refund.
And then save additional money each month (the money you were overpaying the government that gave you this awesome windfall in the first place? :)) to finish funding your emergency savings account until it is fully funded with, if possible, six months’ worth of expenses (but at the very least three months’ worth of expenses).
4. Invest the money for (an amazing!) retirement.
Another great option for what to do with a tax refund is to put the money toward your retirement savings.
If you don’t have one set up already, you should open a Roth IRA and begin putting money in it each month to save toward your retirement. As of 2019, you can save up to $6,000 in your Roth IRA.
So just for fun, let’s say you did that. If you are 32 years old, for example, and you got a big tax refund of $6,000 this year and put it all in your Roth IRA, And then let’s say that you worked till the (now recommended) age of 67. And let’s also say that you invested the money in good, solid growth stock mutual funds and were able to earn the 30-year historical average of 12 percent on that investment. You would have $316,797! Pretty awesome, right? I would take $6,000 and turn it into $316,000 any day. 🙂
If you don’t have a Roth IRA yet, sign up for the cheat sheet below to get simple instructions for how to open a Roth IRA in 10 minutes or less!
5. Invest the money in an educational savings account for your children’s college educations.
If you have children, one of the best things you can ever do for them is to help them have a debt-free college education. (It is possible, and even very doable—I promise! Learn how to save for your children’s college educations.) Don’t let them saddle themselves with thousands of dollars of student loan debt; just don’t! You likely had student loan debt yourself, and I bet you hated it! I bet you couldn’t wait to get rid of it! So save your children from having to go through that experience by helping to ensure that they pay for their college education with cash.
They will thank you profusely for helping to set them up for financial success in life by not having to start out their adult life shackled by student loan debt—I promise.
6. Use the money for a large purchase that you need to make (with cash!).
If your washer and dryer need to be replaced, now might be a good time. If your car is on its last leg, buy a new (to you! not brand new!) car with cash. If you have been wanting to buy a nice piano for your children to put all of those many hours of practice to use on, by all means go for it.
7. Use your tax return to pay for home improvements.
If you are nonmortgage debt free or if you have home improvements that really need to be made before they become an emergency, then using your tax refund on home-improvement projects is a great idea!
We don’t normally get much of a tax refund (because, again, we don’t like giving the government an interest-free loan for the year when we have so many financial goals of our own!), but we are getting a tax return this year, and because we are debt free (including the mortgage!) and already saving for our kids’ college educations, we are going to use the money for some much-needed home improvements.
A speedy driver was kind enough to rearrange the fence on the east side of our home for us, and now we are going to get it replaced and finally pour the approach for the side driveway and do a few other things like that. I’m excited!
8. Use the money to pay down your mortgage!
If you have an adequate emergency fund (of three to six months’ worth of expenses), you are out of all nonmortgage debt, and you are saving the recommended 10 to 15 percent (ideally 15 percent) of your income each month toward retirement, then you are a financial rock star! Congratulations to you!
In that case, a great way to spend your tax refund is to use the money toward paying off your mortgage. My firm belief is that one of the best things that you can do for your own family’s financial well-being, financial security, and ultimate financial freedom is to pay off your mortgage as soon as you can. Once you have paid off your mortgage, no one can take your home from you if you have a financial setback such as a death of a spouse, a major illness, or the loss of a job.
And once you pay off your mortgage, you can invest the money in your own wealth instead of the bank’s! If you will pay off your mortgage as quickly as you can and then pay yourself a mortgage payment every month (as we have started doing since we paid off our mortgage a couple of years ago! #debtfreeforlife), you can then invest that money in good growth stock mutual funds in order to buy a more expensive house with cash in five or more years (which is our plan) or for your long-term financial security and wealth.
9. Put your tax refund money toward a larger down payment to purchase your future home.
Another great option for what to do with a tax refund is to put the money toward your down payment for the future house purchase you are saving money toward. By saving up a larger down payment, your monthly mortgage payment can be smaller. (I know it is extreme, but you might even consider the 100% down plan! That’s our plan for our next home purchase! #100percent down :))
10. Start savings accounts for larger purchases and expenses (sinking funds).
Another great idea for how to use your tax refund is to open individual savings accounts (these are all savings accounts that we have and regularly fund and use) for large purchases and expenses such as car maintenance and repairs, future (cash!) car purchases, home maintenance and repairs, annual life insurance premiums, family vacations, Christmas, birthdays and other gift giving, appliance and furniture purchases and repairs, and miscellaneous short-term savings.
These types of funds are often referred to as sinking funds, and they are a fantastic part of your overall financial success plan so that you can avoid going into debt in these and other areas.
11. Use the money to continue your education.
If you are in a position where you would benefit from additional education to further your career (or just to further your own interests), then consider taking some college classes or completing a certification or other job training program.
One of the best investments you will ever make is in your own education if it helps you to be able to increase your income. And even if you take classes just for fun, additional knowledge is always a worthwhile thing.
12. Start a side hustle or small business.
If you have been wanting to start a side hustle (learn how!) or small business on the side, this could be the perfect opportunity to do it!
I would not recommend that you go into debt to start a side hustle or small business, but if you can do it for cash and have done the research to show it is a good fit and a viable (profitable) option for you, then go for it! Discover 19 awesome side hustles that you can do from home (or anywhere)!
Perhaps you haven’t considered starting a side hustle and should! If your day job lends itself to freelance or consulting work, for example, then starting a business on the side could be a great way to further use your skills, expand your professional network, and earn extra income to reach your financial goals—like paying off debt or purchasing a home—more quickly.
13. Go have some (debt-free, guilt-free) fun!
Whether or not you follow any of the suggestions above for what to do with your tax refund, if you use some or all of the money from your tax refund for some debt-free fun, you will still be ahead of the game!
You could use the money to buy a new TV, a new smartphone, or a nicer (paid-for, please!) car, or you could even go on an epic trip, like my coworker is (he and his wife are going to China!). You could purchase bikes for your whole family (can you say “tandem”? :)). You could pay for an awesome backpacking trip or go to Disney World or take a family cruise.
If you love to save money when you travel like we do, read this article with 5 awesome ways that we save money by using Airbnb! And if you haven’t tried Airbnb yet, you need to! Sign up here to receive $40 off your first Airbnb rental!
There are many great options for what to do with a tax refund, but these 13 suggestions are some of the best ways to spend your tax refund to get the most bang for your buck!
As I mentioned earlier, if you regularly receive a tax refund of more than $600, adjust your tax withholding on your W-2 so that you are instead bringing that money home each month! Then use the money to move you toward financial freedom! Use the money to fund your own amazing financial goals like building a six-month emergency fund, saving more money for retirement, paying off your mortgage early, funding your children’s college educations, or even taking an epic, paid-for family trip!
What are you going to do with your tax refund this year? Are you going to pay down debt, invest, build your emergency fund, save for a large purchase, or spend the money on something fun? Leave a comment below and let me know—I would love to hear your ideas!
Invitation to Share
Was there something in this article that inspired you to change something about your money? Are there ideas or tips that you feel could help a family member or friend or people in general? Would you please take a minute to share this article via email or social media? I would love your help to share these principles of financial well-being with others. Thank you!
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