Are you expecting a check this year around tax time rather than a bill? There are lots of ways to use your tax refund. If you’re like me, you might be tempted to trade your tax refund for a big TV, dinners out, a gaming console or if you’re getting a particularly large sum, a vehicle.
Of course your tax refund is not ‘free money’. It’s not a gift from the government to you. It’s your money that you earned and you are entitled to. I say that to emphasize that you should consider treating it as you would your regular paycheck. You worked hard for that cash so you should treat it with the same respect that you do your regular paycheck Write it into your monthly budget and make some wise decisions about how you want to spend it.
Below are some examples of responsible ways to use your tax refund. Of course what’s responsible for me may not be for you and vice versa. If you own a farm, investing in a good-quality llama may be a great use of your refund. Your circumstances might dictate that you do something different with your refund, these are just some ideas to help you hang onto your hard-earned money or at least get you thinking about what really matters to you.
9 smart ways to use your tax refund
Pay off consumer debt
In my opinion, paying off high-interest consumer debt is the best way to spend a tax refund. The effect is the same as giving yourself a raise as it’s a payment that you no longer have to make.
This is especially true for credit card debt. Most credit cards are between 10-20% interest and department store cards can run up to 29%. Paying down your credit card debt is a worthy use of your refund as it will free up a lot of cash down the road when you’re not making those monthly payments anymore!
Make an extra mortgage payment
Another smart way to use your tax return is making an extra lump-sum payment on your mortgage. Making extra payments can not only save you thousands of dollars in interest, but will help you get your mortgage paid off sooner. Using a simple mortgage calculator, you can work out how much quicker you will pay your home off by making extra payments.
Use it to start an emergency fund
Financial emergencies suck. Financial emergencies that you have no way to deal with are even worse. Whether it’s a broken refrigerator or a blown transmission, you need to be able to cover unexpected expenses. Every single person should have an emergency fund, rainy day fund or whatever you want to call it. A good guideline is to put aside three months of expenses. That way your emergency fund can also serve as a said-the-wrong-thing-to-your-boss fund.
If you think that you might be tempted to spend your emergency fund, consider keeping it in a separate account that’s not accessible through your online banking. You can even open an account at a different bank. Take the card associated with that account, put it in a container of water and put it in the freezer. You still have full access to it if you have a real emergency but you’ve made it difficult enough to access that you’re less likely to blow it on an impulse-buy.
Invest in retirement
I have been employed since I was 15 years old. I’m now 32, and I have had a tax refund every single year I’ve been working. That’s 17 refunds that if I had chosen to invest them, could be worth hundreds of thousands of dollars by now.
I used to think that I didn’t need to retire. Six years ago we started having children, and then I entered my thirties, my knees started to hurt and I changed course on that one. I want to retire, and you’re probably going to want to as well. The sooner you start saving for it, the more you benefit from compound interest. Consider taking your tax refund to a financial adviser and investing for your retirement.
Invest in your education
A tax refund is a great way to kick-start your college funding. Studies have shown that the higher your level of education, the more money you stand to earn in your lifetime. If you want to earn more money, one of the best ways to make sure you’ll get there someday is to go back to school and pursue a diploma or degree in something that you enjoy.
Invest in your children’s education
There’s a good chance that your children are going to want to go to college. If they do, you will probably want to help them along with their tuition and other costs. If you don’t have any debt and your emergency fund is topped up, this can be a smart way to invest your tax return. Even if your children don’t go to college, you’ll have a lump of cash to help them start a business, buy a house or use to pursue a lifelong dream of owning a llama farm. Even if they don’t pursue a college education, your kids will have more options if you make a point to save for it.
Pay your car insurance in full
Some companies allow you to finance your car insurance monthly. I have always paid my car insurance monthly but this year, I’m saving so that when it comes up again, I can pay it in full. Going forward I plan to have the cash on-hand every year to buy car insurance outright.
The more life expenses that you can be ahead of and not paying monthly, the better off you’ll be. The more cash you have on-hand, the less likely you are to be ruined by an emergency. If something major happens that eats up your entire emergency fund, you can use your car insurance fund if you need to. You then have up to a year to deal with refunding the account.
Upgrade your home
If you are debt-free and want to upgrade your home, this can be a great way to use your tax return. Any upgrades that you do are likely to increase the value of your place so it really is an investment. We’re planning on remodeling our kitchen next year and our tax return is going to be a great start.
Make necessary repairs
Maybe your home needs some work, a new furnace or appliance. Maybe your car needs tires. Whatever it is, if you’ve been putting off a repair because you didn’t have the extra cash, tax return time is a great opportunity to get it done and not put the repair on your credit card.
Take a holiday
Wait a minute…take a holiday, seriously?
Yes. If you’re in great shape financially with no consumer debt and a healthy emergency fund, consider using your tax refund for a holiday. You have worked hard and made good decisions for a long time to get to this point. Maybe it’s time to reward yourself with a vacation.
It’s fun to think up ways to use your tax refund. Remember though that if you’re receiving a tax refund, it’s because you overpaid your taxes throughout the year. If you’re getting a significant amount of money back, you might consider having your employer reduce the amount of taxes that they’re deducting from your pay. Having access to that money throughout the year can help you tune up your budget.
Ideally, you’d get nothing back at all. If you’ve overpaid your taxes by $1000, your government gets to hang on to (and invest) that money interest-free all year before they give it back. Personally, I like to have a little extra taken from my pay and know that I’m getting a refund rather than risk getting a bill at tax time instead of a check.
What are you going to spend your tax refund on this year?