10 Smart Ways to Spend Your Tax Refund

The April tax deadline will be here before you know it. Since you aren’t living on this money on a day-to-day basis, this windfall can be used to better your situation. 

Your tax refund can be put to good use in reaching your financial goals. Some wise ways to utilize your tax refund include building up your emergency fund, getting out of debt, or saving toward your future.

Here are 10 ways to put your tax return to good use.

1. Start an Emergency Savings Fund

Everyone needs an emergency fund to help them through a tough financial situation, like a job loss, car accident, or medical emergency. You need an emergency fund to create a cash cushion between you and your need for credit to solve the problem.

The standard advice is to shoot for about six months of living expenses. I think that’s fair, especially if you have two incomes in the home and your jobs are fairly stable. Know your risk, though, and make sure your emergency fund is big enough based on your personal situation.

If a six-month emergency fund seems impossible at first, start with whatever amount you can manage, such as $500-$1,000 to start. Then aim for a 3-month cushion, eventually building it up to a 6-month cushion. 

If you’re looking for a place to open up an emergency fund, look no further than an online savings account.

Related: How Much Cash Should You Keep in Savings? (Plus Where to Put it)

2. Get Term Life Insurance

Life is limited. That’s why there’s life insurance. It’s not a fun fact to face, but it’s a reality we all need to prepare for now. Preparing will give you peace of mind and make it easier for your loved ones. Buying term life insurance is a fantastic use of your tax return.

Purchasing life insurance helps provide financial protection for your loved ones. It can be used to replace income, pay for college, or fund funeral expenses. Term life insurance offers a set amount of money for a specific period. The period of time can be anywhere from 2-30 years. If you pass away during the term of your policy, your beneficiary will receive the insurance money.

Related: Best Life Insurance Companies 

3. Get Rid of Debt

Debt stinks. It causes stress and wastes money due to the high-interest payments. Get rid of it. Make a solid plan to get out of debt (i.e. debt snowball) and get it paid off as quickly as possible. A big tax refund could really wipe out a bunch of debt.

Whether you’re using the debt “snowball” method of paying off the smallest balance first or you choose the debt “avalanche” by paying your highest-interest debt first, what matters most is paying it down faithfully.

If you only have mortgage debt, consider making a principal-only payment. This reduces your total amount owed rather than sending it all to interest payments.

Related: A Simple Strategy to Get Out of Debt for Good

4. Save Money for Other Short-Term Goals

An emergency fund is a good starting point, but surely you have other short-term savings needs. Can you think of any reasons you’ll need a large chunk of cash in the near future? Here are a few ideas to get you started:

• new or used car
• major car repairs
• trip or vacation
• boat or motorcycle
• downpayment on a home
• furniture
• improvements to your home
• new clothes

Don’t go into debt to afford life’s upcoming necessities and pleasures. Use your tax refund.

Related: The Important Things We’re Saving for: Our Short Term Goals

5. Saving for Retirement

My favorite (best) thing to do with your tax refund is to use it towards retirement savings. If you have a 401K through your employer, you could stash the funds there.

Many people use their tax refund to open an IRA. You guys know I love these. You can open them on your own with an online stock broker and control just about everything that happens with the money there, unlike your 401K. Here are the IRA contribution limits for this year. 

Of course, there are the tax benefits that come along with saving for retirement with your tax refund. You could actually increase your return if you contribute to a traditional IRA, or SEP IRA (or even a Solo 401K) if you’re self-employed.

Related: Retirement Calculators [How Much Will You Need to Retire?]

Business Owners

So if you already have your emergency fund in place, contributing your $1,200 (or more) towards your self-employed retirement plan would be a really smart move. And if you haven’t opened a self-employed retirement account yet, now would be a great time to do so.

Whether you choose a SEP-IRA, a SIMPLE IRA, or a Solo 401(k), they each come with higher contribution limits than individual IRAs. And side hustlers can open up self-employed retirement plans too! Not sure which self-employed retirement plan is right for you? This guide will help you decide.

You can check out Betterment or Rocket Dollar for their roboadvisor investment options if you aren’t comfortable doing the investing yourself.

6. Save for College Expenses

Some people choose to use their tax refund to open up a 529 college savings plan for their child(ren). Money that you sock into your 529 plan can grow tax-free as long as it’s used for qualifying expenses.

As long as you choose a “savings” plan vs. a “prepaid” plan, your child(ren) can use the funds at any college or university that they want.

Here’s our ultimate guide to 529 college savings plans.

Related: 5 Ways to Save for College

7. Go Back to School

Use your tax refund to go back to finish or start a degree. I love seeing people invest in themselves. Do it for fun, or see it as a way to increase your earning potential at your current (or future) employer.

Related: 7 Best Online Training Sites to Expand Your Skills

8. Pay Next Year’s Taxes

If you own a business or have income where the tax isn’t withheld, it’s likely a smart idea to take some of your refund and use it to make estimated tax payments or at least save it for future tax payments.

9. Start a Business

Now you have the cash to start that business you’ve always wanted. You can tell someone is really passionate about their business idea when they self-fund the thing like this. Using your own money to start a business is definitely a better idea than taking out some business loans or borrowing from your relatives.

Related: Start a Business with No Money: Do You Want it Bad Enough?

10. Give to Charity

If the tax refund is a surprise to you, then why not use it to help a worthy cause? There are definitely plenty of organizations that could use the funds more than you. If you do decide to give, use a qualifying charitable organization and get a deduction next year on your taxes, if you itemize.

Related: 10 Ways to Give More to Charity

Next Steps

There are lots of things you could do with your refund: save, spend, give, or invest in your future. Pick one or a few smart ways to spend your tax refund that will give you lasting benefits. 

What do you plan to do with your refund? If you already spent the money, what did you spend it on?