The average tax return clocked in at a sizable $2,725 for 2019 according to the IRS filing season statistics. For some people, their tax refund is the largest chunk of money they will receive the entire year.
While it may be tempting to blow the refund, doing the right thing with your windfall could put you in a better financial position down the road.
If you’re looking for some of the best ways to spend your tax refund this year, here are a few ideas to consider.
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Pay Down Debt
If you have high-interest debt, paying it down will give you the biggest bang for your buck. Let’s say you have $2,500 in credit card debt and you have been paying the minimum payment every month. With an average interest rate at 16%, paying your debt down is like getting a 16% return on investment.
While it may feel painful to put the money toward a debt obligation rather than something fun, you will feel much better without the monthly payments weighing down your budget. You will also sleep better at night knowing you don’t owe the money.
Pad Your Emergency Fund
Are you prepared for an emergency? If your water heater breaks tomorrow or your roof leaks, are you ready to shell out the money for the repairs?
Having an emergency fund in place can help you weather unexpected expenses rather than leave you scrambling for a way to cover the bills. If you are still paying down debt, you can start with a $1,000 emergency fund to avoid charging your credit cards when disaster strikes.
Once you are in a better financial situation, try to stash away between three and six months of living expenses in your emergency fund. This can help carry you through a job loss or another event resulting in a sudden loss of income.
Best Places To Keep Your Emergency Fund
- American Express® Personal Savings: Earn 1.00% Annual Percentage Yield (as of 06.25.2020) with no minimum balance required and no minimum deposit required.
- CIT Bank: Earn 0.95% APY with just a $100 deposit required to open an account. (Savings Builder)
- Discover Online Savings Member FDIC: Earn a 0.95% APY with no monthly maintenance fees and no minimum balance required.
Fund a Future Goal
Are you saving for a vacation? Do you want to renovate your kitchen? Even if the amount of your refund is not enough to cover the expense, consider putting a chunk of your check toward your future goals.
This will help you avoid debt and pay cash when the right time rolls around. You will feel so much better knowing everything is paid for and you won’t have a monthly payment hanging over your head.
Invest For the Future
If you’ve already funded all of your retirement accounts, you may consider putting some of your money in the stock market. Instead of picking individual stocks, consider investing in exchange-traded funds.
With low fees and built-in diversification, it can help smooth out some of the market volatility. If you set your investment portfolio and forget it, the money will continue to grow until you’re ready to use it. Investing in the stock market carries some inherent risk so don’t invest more money than you’re prepared to lose.
Keep in mind that you will have to report income from investments in a brokerage account and pay taxes on it. However, this can be a nice stream of income to add to your regular paycheck.
Recommended Online Discount Brokers
- You Invest by J.P. Morgan: Best for free trades and cash bonuses.
- Ally Invest: Best for new investors and those looking for a very easy website to navigate.
- TD Ameritrade: Ideal for more experienced traders looking for a rich set of tools and resources.
- E*TRADE: Offers trading platforms and tools for any investment style.
Related: How to Invest for an Income
Prepay Your Mortgage
If you have a mortgage, consider paying down some of your principal using your refund. While it won’t eliminate your payment, it will reduce the amount of interest you end up paying in the long term.
When making the payment, mark it as a payment toward the principal amount. If you don’t, you risk the mortgage lender applying some of the amount toward the loan interest.
Add to Your Retirement Accounts
Another great option for using your refund is topping off your retirement savings. If you contribute through your work’s 401(k) program, call your employer’s human resources department to find out if you can make a bonus contribution outside of what gets deducted from your paycheck.
A Roth IRA or a traditional IRA are also great places to stash your tax refund. They come with tax perks, which can make this an even better deal. Once you contribute, just let it ride the waves of the market until you’re ready to retire.
Tip: With Blooom, you can get a free analysis of your retirement plan and for $10 a month, blooom will manage your 401(k).
Fund a College Savings Account
Saving for college can be a difficult goal with all of the other demands on your paycheck. If you want to help your child with higher education costs, funding a college savings account can be an excellent option.
Depending on your saving horizon and how many children you have, your tax refund can help fund a sizable chunk of your annual contribution needs.
Invest In Yourself
Your career is one of your most important money-making assets. This is why you should set some money aside every year to invest in yourself. You can take advanced courses in your field, attend a conference or get a certification.
If you’re considering going back to school, you can use your refund toward a semester of classes at a community college. Every dollar you spend will come back to you tenfold in better career opportunities and a higher salary.
Focus on a Home Improvement Project
If you have a smaller home improvement project on your list, a tax refund can give you the capital to get it done. This can include repainting a room, fixing up your back patio and yard or sprucing up your house’s curb appeal.
Another great way to use the money is toward deferred maintenance projects. For example, replacing a broken garbage disposal can help you feel better about your space and remove a big annoyance.
Upgrade Furniture or Appliances
Are you dealing with high energy bills because of an inefficient washer-dryer set? Is your couch falling apart at the seams? Consider putting part of your refund check toward upgrading your furniture or appliances.
If you use cash instead of financing the purchase, you may be able to negotiate a discount. If you don’t mind going the used route, check out Craigslist or Facebook Marketplace for deals at a fraction of the retail price.
Start a Business
Starting a business can help you build another stream of income or leverage your experience to run your own company. Whether it’s starting a blog, working as a consultant or mowing lawns on summer weekends, having a little capital can help you get started.
Use your tax refund to get the equipment, certifications or training needed to get your business off the ground.
Take a Vacation
If you dream of sipping margaritas on the beach but your bank account only allows for staycations, a tax refund may be what you need to book a getaway. Use the cash to book a vacation you won’t forget and enjoy it without going into debt.
As a bonus, memories of your relaxing days off will help carry you through stressful times at work.
Donate to a Charity
If you would rather use your tax refund to help someone else in need, consider donating part or all of it to a charity of your choice. There are many worthwhile causes in your community that need your support.
Not sure where to start? Check out this guide from Charity Navigator on how to support charities you trust with confidence.
Enjoy an Experience
Researchers at the University of Texas at Austin found that spending money on experiences rather than material purchases made people happier. If you want to use your refund to boost your happiness, consider spending money on experiences important to you.
This can mean scoring tickets to see your favorite artist play live or enjoying dinner at an amazing but expensive restaurant in your town. Just focus on savoring the experience so you can enjoy the memories for months to come.
There are many ways you can spend your tax refund. Rather than blowing the money with nothing to show for it, consider picking one or two of the options above to put yourself in a better financial situation or spend the money with a purpose.
Are you getting a check from the IRS this year? If so, how do you plan to use it?