Wondering how to get the most out of your tax return? These ideas will help you decide what to do with your tax refund and get your finances in order.
If you are like many Americans, you’ll be getting a nice chunk of change back from your tax return…yay for free money!
Except, it’s not free money.
Your tax refund is actually your hard-earned money that the government was simply holding interest free for the past year, so you may want to put that money to work for you.
What to do with your tax refund?
Here are 5 smart things to do with your tax refund to ensure a brighter financial future 😉
1. Create an emergency fund
Even if you aren’t good at saving, everyone should at least have an emergency fund, and your tax refund is the perfect way to quickly get that fund in place.
A good place to start is putting aside a minimum of $1000. Saving more is never a bad thing, but that thousand dollars will be a good place to start and should cover many “Murphy’s” that show up uninvited.
Keep in mind that emergency funds are meant to be used for, you guessed it, emergencies. And by that I mean true emergencies. A few things that would not count as emergencies include Christmas, summer vacations, a fabulous pair of shoes on sale…you get the point.
You need to have a fund in place to be used for those unexpected expenses that pop up so you know you’ll be able to handle them without going broke or running up credit cards. Simply put, an emergency fund will save your sanity at a time when stress-levels will most likely already be high.
2. Pay off debt
Another great way to use your tax refund is to pay off debt.
With the exception of an emergency fund, paying off high-interest debt should be a priority over putting your tax refund in a low-yielding savings account. It doesn’t make much sense to have your tax refund sitting in an account collecting next to nothing, while maintaining a large balance charging over 18% interest.
Paying off as much of your high-interest debt as you can and then rolling the payments you were making into savings each month is a much better plan.
If your finances are completely chaotic and you need some help getting organized, here are a few tips to create a budget 😉
3. Invest in yourself
If you’ve been thinking about furthering your education or maybe even starting a business, your tax refund is the perfect tool to get the ball rolling.
You can use it to pay for tuition for courses, stock up on inventory, or design a website for a business you’ve been dreaming of starting…that’s exactly what I used my tax refund for when I invested in Elite Blog Academy, the course that has really helped turn my blog into a successful business.
4. Pay an extra mortgage payment
Did you know paying just one extra mortgage payment each year can have a huge impact on your loan over the long run? That’s why putting your refund towards an extra mortgage payment is a great idea!
Since so much of your payment covers interest on long-term loans, when you reduce the principal by making extra payments, it can have an exponential effect on the life of the loan – often tens of thousands of dollars!
Take a look at Bankrate’s Mortgage Payoff Calculator to see just how much interest you can save by increasing your mortgage payment.
5. Tackle money-saving home improvements
If you are anything like me, you love doing improvements to your home when you have the money. Using your tax refund to do some strategic improvements will not only pay for themselves in utility savings, but will also make your home more attractive should you ever decide to sell.
Some examples of improvements to consider include replacing doors and windows to reduce your electricity bill, purchasing new appliances to save on energy consumption, and installing a low-flow shower head to cut water costs.
It can be so hard to say no to that vacation you’ve been thinking about when you have a lump of cash sitting in your bank account, trust me…I know, but putting your tax refund towards one or more of these ideas will greatly reduce your financial worries.
I know it’s not fun, but now that you know how to get the most out of your tax refund, you’ll enjoy that dream vacation even more once your finances are in order 😉
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Kara, good tips. Most financial experts would say that if you’re getting a sizable (or any) refund, you’ve overpaid, and like you mentioned, just given the government an interest-free loan. So, in theory, you should adjust your tax withholding so you get all of your money back with each paycheck during the year. If a person is somewhat incapable of saving on their own, wouldn’t having more taken out each paycheck essentially be a forced savings account (automatic and somewhat painless)…so maybe a good thing?
Hi Matt!
Thanks so much for stopping by! I totally get what you’re saying…and in fact did that ourselves for many years. Another idea would be to have money automatically deducted from each paycheck and put into a high interest savings account that they have access to…just in case of an emergency
This wouldn’t really help someone who like you said is incapable of saving on their own and would just keep withdrawing from the savings account, but I think self-discipline is huge if you want financial freedom and is something that needs to be developed first 🙂