Maximize Your Tax Refund: 10 Smart Ways to Use Your Refund

Some people think of April and May as the start of spring, but financially speaking, spring means tax season. And while filing your taxes may not fill you with joy, getting that tax refund check will almost certainly put a spring in your step.

1. Start An Emergency Fund

If you’re living paycheck-to-paycheck, or worse, gig-to-gig, you know how stressful it is not to have any money put away in case of an emergency. Ideally, you’d have an emergency fund that covers 6 months of living expenses, but even having 1 month’s worth put away will give you some breathing room and peace of mind.

2. Pay Off Credit Card Debt

If you’ve got some money put away, your next top priority should be to pay off your credit card balances. Credit cards offer tremendous convenience, and they are a necessity of modern life, but make no mistake – they are not your friends. To stay motivated, remind yourself that once your debt is paid off, you’ll be able to spend your tax return on something you really want.

3. Prepay Your Other Debt

Chipping away at your debt will save you big down the road in interest payments.

Unsecured Debt

Once you’ve gotten rid of high-interest credit card debt, you can begin attacking your other unsecured debt, like student loans or personal loans. These forms of debt typically charge lower interest rates than credit cards, but they are still higher than secured debt – and the sooner you can pay them off, the sooner you can begin spending your money on the future instead of the past.

Secured Debt

Once your unsecured debt is paid off, there’s no reason not to start paying off your secured debt. A thousand here, a thousand there, and pretty soon, you’re building home equity much faster than you ever dreamed you could. If you put less than 20% down on your home, you’ll see the savings in your monthly payment when you meet that threshold – you can ask to have private mortgage insurance charges removed going forward. 

4. Save Toward A Big-Ticket Purchase

Planning to buy a house or a car this year? Save your tax refund in the account you’ve dedicated toward the down payment on your home. In fact, you can request that the IRS deposit it directly into your savings account. Devoting every extra dollar of found money to the cause will get you to your goal that much sooner.

5. Contribute To Your Children’s College Fund

If you have young children, you’ve probably spent some time worrying about how you’ll eventually pay for college. There’s no question that it can be very difficult to find any discretionary income if you’re still in the earlier stages of your career and maybe have just bought a new home. Set up a 529 account to shelter your contributions from taxes and have the check deposited there. When you watch your child cross that graduation stage, Future You will be thanking Present You for your foresight.

6. Put It Toward Your Retirement

It may seem far off, but that’s the beauty of compound interest – if you start saving earlier, you’ll put in less of your income and be able to live off your returns. The truth is, retirement isn’t as far off as you think. You can set up a Roth IRA account from the comfort of your couch and have your check sent there.

The one problem with retirement savings through a Roth or a traditional IRA is that younger depositors won’t be able to access the money in the account before retirement without being forced to pay withdrawal penalties. That’s because the government created these tax shelters specifically because it wants Americans to save for retirement, and the best way to ensure that is to make it difficult to access the money in those accounts.

7. Invest In Your Home

If you own your home, and you’re already contributing to a savings plan for college and retirement, you might want to consider making an investment to boost your home’s value. Keeping your home up to date will ultimately benefit you when you sell your home. Keep in mind that the costs of a capital investment to your home can be added to your cost basis in the home, and ultimately reduce any capital gains taxes you might face. In the meantime, why not enjoy an upgraded kitchen?

8. Invest In Yourself

Have you been thinking about how much more you could earn if you had your college degree or an advanced degree? Do you have a great business idea but no money to invest in it? Have you always dreamed of going to law or medical school? Remember that money spent on your education is an investment in your future, and especially your future earnings.

9. Invest In The Stock Market

Even if you’ve already maxed out your 401(k) and Roth contributions, you can still invest in the stock market by opening a brokerage account. You’ll have to pay taxes, but you’ll still earn more on average by investing in stocks than you will in other investments. On any given day, however, you might lose more than you’ve earned, and for many, that volatility makes investing in stocks unattractive.

10. Make A Charitable Contribution

Let’s face it – if you’ve already got a healthy emergency fund, little to no debt, retirement and college savings plans in place, a home in good shape, plus your income is where you want it to be, with a diversified stock portfolio – you’re doing well.

If you’re getting a tax refund, you can forgo spending your refund and simply give to those in need. The pandemic has created even more opportunities than usual to give to worthy causes that need a helping hand. If you itemize on your taxes, you’ll even get a deduction for your good deed.

We have some great ideas about ways to use that check to bring you greater peace of mind throughout the year.

The Bottom Line: You Can Plant Many Seeds For A Better Financial Future

Found money can be like junk food, in that it’s easy to consume lots of it without gaining anything of value. But you can treat that money like a seed to a more financially secure future instead. Looking to learn more about how to set yourself up for success? Keep reading for some more advice about your personal finances.