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You can use your tax refund to boost your finances, pay down debt, help a charity and more. Find out the most effective ways for you to spend that money.
Getting a tax refund this year? Instead of going on a spending spree, consider putting part of it toward improving your finances. This can include padding your emergency fund, adding to your child’s college savings, paying down debt and investing for the future.

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.

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

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.

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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.

Related: Best Credit Cards for Home Improvement

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.

Related: Should You Start a New Business After the Pandemic?

Use your tax refund to get the equipment, certifications or training needed to get your business off the ground.

Related: How Not to Get in Trouble with the IRS (For Small Business Owners)

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.

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.

Bottom Line

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.

Related: How to Get Your Tax Refund Deposited On a Prepaid or Debit Card

Are you getting a check from the IRS this year? If so, how do you plan to use it?

Author Bio

Total Articles: 5
Veneta Lusk is a family finance expert, freelance writer and blogger at BecomingLifeSmart.com. After becoming debt free, she made it her mission to empower people to get smart about their finances. Her writing and financial expertise have been featured in notable publications like MSN Money, Yahoo! Finance, Go Banking Rates, The Penny Hoarder and Money Talks News. She holds a degree in journalism from the University of North Carolina - Chapel Hill.

Article comments

2 comments
Christian L. says:

Abby,
I wish more people understood how wise it is to save your tax refund. Mine was quite small but it went straight into my emergency fund. People think, “Oh, that’s not a significant amount to save.” Ahhh, it drives me nuts!

Thanks for the list of wise moves!

-Christian L. @ Smart Military Money

Julie Gaudet says:

My tax refund wasn’t very high this year… but it went straight into my Financial Freedom Account (aka retirement savings). There was never a question in my mind where it was going.