6 Smartest Ways To Put Your Tax Refund To Good Use
Written by
Nicole Spector
Edited by
Molly Sullivan
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Tax season is in full swing and coming to a close, and with it the heightened anticipation among millions who are expecting a tax refund when they finally get around to filing. However, these refunds are symptomatic of poor financial planning to put it simply, it’s just money you overpaid the government throughout the year that is being returned to you, sans interest or any other financial benefit.
That big check doesn’t have the same wow factor under that lens does it? Though you’re understandably excited to receive a refund from the government, especially if you’re living paycheck to paycheck and unable to afford much beyond the basics, this may be a sign of a bigger financial issue in the long run.
Before you are tempted to use your tax refund to splurge on a weekend getaway or a shopping spree, maybe think about a better investment strategy for your future. Tough times are no excuse to waste money, no matter how good it feels in the moment. Let’s consider six of the smartest ways to use your tax refund, according to financial experts.
Build Up an Emergency Fund
Most Americans are financially unprepared for an emergency, with the majority being unable to cover a $1,000 unexpected expense. This means that when costly emergencies happen, those people will be forced to turn to credit cards, high interest rates and a potential debt spiral.
If you don’t have a cash reserve in a high-yield savings account (HYSA) that can float you for six months in the case of sudden job loss or another catastrophe, don’t think twice: Use your tax refund to start or replenish your emergency fund.
“While three to six months of expenses may be a great starting point to consider, know that the most impactful money move to ensure you have adequate money set aside is to start now and ideally automate additional transfers regularly until you have met your goal,” said Alissa Krasner Maizes, Esq., founder and fiduciary financial advisor at Amplify My Wealth.
Wipe Out Credit Card Debt
Are you carrying any credit card debt? If so, get rid of as much as you can with your tax refund.
“Average credit card rates are over 20%,” said Kyle Enright, president at Achieve Lending at Achieve. “If you pay off an outstanding balance, you avoid losing that 20% — which is, in effect, making a 20% return. You have that money to save or invest, meaning it can earn more money for you. And you’ll decrease stress.”
Contribute To Retirement Savings
Next on the list of very smart ways to use your tax refund: Put it toward your retirement.
“Being able to put your refund in an IRA or Roth IRA and invest within the retirement account will help you prepare for retirement,” said Ashley Morgan, attorney and owner at Ashley F. Morgan Law, PC.
“Saving for retirement and investing it as early as possible allows for the most compound growth possible.”
Note that this is as important to do at 25 as it is at 55.
“If you start young, you can save less each year and have more in retirement due to compound growth,” Morgan said. “Saving for retirement now can help your overall budget later on. It also may allow you to be able to retire in the future when you want to and not have to work in your old age.”
Fund Your Health Savings Account (HSA)
If you have a health savings account (HSA) and haven’t hit the contribution cap, definitely use your tax refund to fund it.
“Contributions are tax-deductible, even if you don’t itemize on your tax return,” Enright said. “Withdrawals to pay qualifying medical expenses are tax-free, anytime in life.”
Best of all, you can use your HSA anytime; it never expires.
Get Ahead of Any Home or Car Maintenance Expenses
Have you been meaning to do any home maintenance but are waiting until it’s urgent? Stop waiting and use your tax refund to handle it now.
“Take care of any needed maintenance in your home to make sure no bigger (and more expensive) problems arise later on,” Enright said.
Same goes for your car(s)!
Level Up Your Skills
If you’re thinking about starting a new career or launching your own business in the future, it’s a good idea to sharpen your skills and possibly learn new ones. Use your tax refund as an investment in education. There is no shortage of courses you can take online.
“Investing in yourself can pay huge dividends in the future, help you reach your goals and assist with attaining better work/life balance,” said Kathy Gilchrist, founder, CFO at Cardinal Bookkeeping & Advisory.
Caitlyn Moorhead contributed to the reporting for this article.
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