Now that tax season is in full swing, everyone has questions about what to do with their refund:
What should you spend your tax refund on?
What is the smartest thing to do with tax refund?
How do I not spend my tax refund?
If you are one of the 3 in 4 Americans receiving a tax refund, you’re probably asking these questions, too!
Used correctly, a tax refund can have a huge impact on your financial situation.
Whether you’re receiving a few dollars or a few thousand, how can you spend your tax refund to improve your finances?
Read on to see the 4 smart things to do with your tax refund- and 3 things to avoid!
Smart Things to Do With Your Tax Refund
Create Financial Security
If you’re having trouble paying your day-to-day expenses, use your tax refund to cover them.
Use your refund to cover your immediate necessities, pay bills, and make minimum payments on your debt.
If you are struggling to pay for your gas, groceries, or housing, do not feel like you need to use your refund to reach a major goal.
Plain and simple.
If you’re struggling with paying your bills with your current income, check out my guide to budgeting for beginners to start getting your finances under control.
Give Yourself Peace of Mind
Nearly 25% of Americans do not have an emergency savings.
And 40% of Americans cannot afford a $400 emergency without going into debt.
If you fall into this group, consider using your tax refund to fund your emergency fund.
An emergency fund is a safety net to keep you from landing yourself in a crisis and falling deep into debt over an emergency.
Your long-term goal should be to fund your emergency fund to 3-6 months.
Anything you can put into an emergency fund is progress towards achieving your goal and peace of mind.
Set Yourself Free From Debt
If your day-to-day expenses are paid and you have some money to cover an emergency, consider using your tax refund to pay down debt.
Depending on your goals, use your refund as a Debt Snowball to pay off your lowest balance or a Debt Avalanche to pay off your highest interest rate.
If you pay off a $2,200 credit card debt balance with a 17% interest rate, you could save yourself $3,585 in interest payments.
Important note: If you’re going to use your refund to pay down debt, make sure you’re not going to run up the credit card balance again next month.
Once you pay off a debt balance, focus on making a budget.
Living within your means will help prevent you from getting into debt again.
Build A Financial Future and Retirement
If your bills are paid and your high-interest debt is paid off, consider using your tax refund to invest.
Wondering if you should invest while you’re still in debt?
Check out my step-by-step guide to determine if you should invest while in debt– the answer might be yes.
Whether it’s in a brokerage account or an IRA, investing your refund is a great way to bolster your financial future.
Things to Avoid Doing With Your Tax Refund
Wasting Your Refund on Temporary Satisfaction
When your tax refund check comes in, take a serious look at your finances.
Consider what you really NEED and where that money will serve you best.
Do you NEED new clothes, new shoes, or a car?
If the answer is truly yes, then buy yourself what you need.
But if you don’t need them and you wouldn’t buy them with your regular monthly budget, don’t use your tax refund to buy them.
Splurging on material items that you don’t need will not improve your financial situation.
Betting Your Refund on 100% Risk
I beg you: Do NOT cash out your tax refund, take it to a casino, and bet it all on black.
Gambling your tax refund is taking on 100% risk with absolutely no guaranteed rate of return.
If you want thrill and risk, bet your refund on a long-term investment in an index fund- that’s what your financial future deserves.
Saving Your Refund in an Account Making 0% Interest
If you are planning on saving your tax refund, do NOT put it into your checking account.
There are two reasons for this.
First, your checking account gets 0% interest on whatever your balance is.
If you are going to save money, put it into a savings account (preferably a high-yield savings account) and let your money make money.
Second, if you put your refund into your checking account, there’s a high risk of spending it along with your regular monthly spending and not noticing.
Putting your tax refund into a dedicated savings account protects it by making it harder to spend.
Wrapping It All Up
If you receive a tax refund, it’s a great chance to improve your current financial situation.
If you need the money to pay your bills, use it for that.
Otherwise, aim to save or invest it for future goals and returns.
Whatever you do, don’t spend it on things you don’t need, gamble it away, or stick it somewhere it can’t make money.
Let your refund help you make progress towards your next Level Up!
Are you expecting to receive a tax refund this year? If you are, what do you plan on doing with your refund? If you aren’t expecting to receive a refund this year, what is the best way you’ve used your refund in the past?
Share your answers in the comments!
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