8 Smart Things to Do with Your Tax Refund
With each new year comes W-2 or 1099 forms, filing your taxes (if you are not a procrastinator), and getting your refund. The average tax refund in 2019 was $3,068. That is a lot of money, and you might be considering a shopping spree or other splurge, but hang on.
Remember, this is not extra cash; it is your own money that the IRS is returning to you. You can do some very smart things with your refund that will make your life better in the long run. And nobody is saying you cannot splurge a little…
1. Beef Up or Start an Emergency Fund
Dave Ramsey’s advice starts with saving $1,000, and we agree. It is essential to have a cushion when you have events that you did not anticipate and could not plan for, like a major appliance breaking down, illness, or job loss. The initial $1,000 is just a seed; the general rule of thumb is to have enough to cover three to six months of living expenses. So, make that initial deposit, and then a plan to increase it. To help you figure out how much you should save, use our handy calculator.
2. Pay Down Debt
This can have an immediate impact, and there are two approaches: pay down the highest cost debt or pay off the lowest balance first. If you want to pay down the debt with the highest cost, look at all of your credit cards and loans and see which one has the highest interest rate. That is what you will want to pay down first. You will pay less in interest charges each month, which lowers your payment and helps you pay off that debt faster – if not eliminate it. You could also choose to examine your loans and credit cards to find the ones with the smallest balances and completely pay those off. Both of these strategies have short-term and long-term benefits, and you just have to pick one and use your refund to get started.
3. Start Saving for Something Big
If you want to take a great vacation when it is safe to do so, or you have decided it is time to buy a house, you can use your refund to kickstart your financial goal. Start a new savings account; keeping these funds separate from your regular accounts helps you manage it better, and you are less likely to dip into it for splurges. Look into dedicating a portion of your paycheck to this fund by setting up a direct deposit or a recurring account transfer to move money into that account regularly. We have a great calculator to help you with this, too.
4. Make Home Improvements
For less than $1,000, you can make home improvements that will positively impact your daily life. You could repaint one or more rooms, install new faucets, add new landscaping, or organize your garage. Not only will these enhancements make you feel a little happier, but they also add value to your home if or when you decide to sell it.
5. Replace an Inefficient Appliance
If you are still using an old refrigerator or washer/dryer combo, consider donating them to a reputable charitable organization and buying a greener, more energy-efficient replacement. You will enjoy an upgraded appliance, and your utility bills and impact on the environment should be lower, too.
6. Buy More Insurance
Life insurance can be easy to overlook, especially if you are younger and believe you have plenty of time to worry about stuff like that. For married families, a term life policy can protect loved ones at a relatively low cost. Spending a small portion of your tax refund can help protect your family if the unthinkable happens. You can also consider an umbrella liability policy to beef up your coverage beyond the limits of your car or homeowner’s policy. It is more affordable than you think.
7. Make an Extra Mortgage Payment
Making an extra mortgage payment can make a big difference in what you owe to your lender. Because much of your payment goes toward paying off the interest, any additional funds are applied to the principal. This can have an exponential effect over the life of your loan.
8. Adjust Your Withholding
If your tax refund is substantial, think about adjusting your withholding amount. Sure, it is great to get a big refund, but what if you could give yourself a raise every month by reducing the amount that is taken out of your paycheck? It is YOUR money; use it to your advantage. Before you do this, be sure to consult your tax advisor to discuss the amount you should be withholding so you do not reduce it too much and end up paying next year.
It's tempting to take that refund and spend it on things that make you happy because it seems like it is just extra money. It is not. It is your money, you worked hard to earn it, and you should put it to work for you.