Wondering what to do with your tax refund? If used wisely, you can make the extra cash go a long way. Keep reading to learn about 15 ways you can get the most out of your tax refund, positioning you for a more comfortable financial circumstance.
Please note that MoneyLion does not provide tax advice. Please consult a tax or legal adviser for guidance regarding your individual situation.
What should you do with your tax refund?
What you do with your tax refund is ultimately up to you. If you’re looking for tips, though, using the money tactfully and frugally to help build your financial future is one of the smarter options.
Although spending your refund now on nice things for yourself could bring short-term gratification, putting the money aside for future projects can help you stay on track for your long-term goals. The value of your refund could help you get out of debt or set you up for retirement.
15 ways to get the most out of your tax refund
Many Americans receive a refund when they finalize their tax returns with the IRS, and an average tax refund comes to about $2,800. Read more to find out 15 smart ways to get the most out of your tax refund.
1. Build your emergency fund
An emergency fund is a financial security net that is set up in case an unexpected life event happens and requires a fair amount of money to cover the situation. Potential unexpected life events can include losing your job, experiencing medical issues, or needing major car repairs.
Your emergency fund isn’t just a piggy bank. Some banks offer high-yield interest rates up to 5%, which can increase your overall savings.
MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.
2. Pay off debt
Debt starts a difficult cycle. You pay interest on it, which means the longer you take to pay off the loan, the more you’ll spend on it in the end. Plus, having a large amount of debt can impact your credit score, preventing you from qualifying for certain loans.
Increasing your payments on your debt can save you money in the long run. It also gets you closer to a point where you get more money in your pocket with each paycheck, as you won’t have to spend it on the loan. That can put you in a better financial position in the future and provide you with peace of mind.
3. Invest in your retirement
Investing in your own retirement may seem like you are planning far ahead, but the sooner you start contributing, the more you could have by the time your retirement comes along.
Putting this extra money towards your retirement fund, whether that’s an IRA or a 401(k), could be a great way to slowly contribute to your future retirement. The more you’re able to put in, the more the money can build on itself.
4. Kickstart your career
Your tax refund could also be used to improve your current skill set to enhance your career. Invest in yourself by putting your tax refund toward courses in your field of study to land that next promotion.
5. Save for big purchases
Saving up for a big purchase could seem overwhelming, but putting some of your refund toward purchases means fewer months you’ll have to spend saving up. If you are looking to buy a home in the future, you may be able to set aside money for a down payment now.
As an alternative, you could use this amount to save up for holiday gifts, a car, or home renovations. In the long run, your tax refund could help you in the future when it comes to making a big purchase.
6. Fund your next vacation
Need a break and want to go on vacation? Rather than spending impulsively, wait until you have extra money from your tax refund. Set aside a chunk of change for your next vacation and start planning the trip.
By saving these extra funds for a vacation you might be able to worry less about charging your credit card or taking out loans. Plus, you’ll thank yourself in the future if you’re enjoying free time in a nice change of location.
7. Pay extra on your mortgage
Increasing your monthly payment or making an extra payment is a fantastic thing to do as often as you can. The faster you pay off your mortgage, the less you’ll have to pay in interest. Even a few thousand dollars extra could take years off the life of your loan.
8. Save for your kids and their future
Education, medical care, clothing, and after-school activities can pile up over time. Starting a bank account or a college fund can help fund your child’s future. Additionally, proactively saving for your child’s education can reduce the possibility of having to take large loans to pay for their college tuition.
9. Invest in your education
Other than preparing for your child’s career, you can also benefit from investing in your own. With the extra money from your tax refund, explore the topics you’d always hoped to learn more about. You may be able to turn that knowledge into cash in the long run, gaining access to more job opportunities and higher pay.
10. Look into a home improvement project
Investing in your home is a great way for you to maintain or improve its value. Home improvement projects can range from redesigning space to upgrading your kitchen appliances. Setting this money aside to help pay for renovations can help your property preserve or increase in value. Additionally, upgrading your can enhance your comfort and enjoyment throughout the space.
11. Get life Insurance
Life insurance is a way to support your family even after you pass away. You may have better peace of mind if you know your family has funds to pay for funeral expenses, medical bills and mortgages.
12. Add to your health savings account (HSA)
A health savings account lets you set aside money for certain medical expenses that won’t be taxed. That money can be used for bills like copays and deductibles, lowering your out-of-pocket costs. Using your tax refund to add money to your HSA can be a smart choice for many consumers.
13. Open a business
If you’ve always wanted to start a business but haven’t had the money to kick things off, your tax refund can be the perfect place to start. Plus, since the money wasn’t something you had in your pocket originally, it can feel like a free extra check that doesn’t seem as risky to lose.
14. Start a diversified portfolio
Investing is an opportunity to potentially turn the cash you have into more money. If you put your money into stocks and bonds in companies that turn out to be successful, in time you may get paid back even more than you initially put in. That means that you can use your tax refund to try to create more money. Dabble in stocks and bonds, open a high-yield savings account, or invest in a low-cost index fund. Investing is subject to risk of loss, including loss of principal.
15. Donate to those in need
Since your tax refund isn’t something you’d factor into your monthly budget, you can spend it more freely than the money on your typical paycheck. Consider that others may be struggling more than you at the moment. You may want to use your tax refund to donate to those in need.
Your Refund: To Save or to Spend
No one can direct what you do with your tax refund, but it’s smart to try to use it strategically. You can pursue side hustles, go back to school, pay down debt, save for additional expenses, or put the money in the market. Investing in yourself and your future could help you move toward financial security and start building a foundation for financial freedom.
FAQ
When will I receive my tax refund?
Your tax refund normally processes three weeks (21 days) from when you file if you do so electronically. Paper filings take longer for the return to come in. Go to IRS.gov to learn more.
How can I track my tax refund?
You can check on your tax refund status by contacting the IRS or the taxation department for your state.
Are there any tax credits I can take advantage of?
Yes, depending on your circumstances, you may claim several tax credits. Examples include the earned income tax credit, the American Opportunity Tax Credit, and credits for electric vehicles, home ownership, and healthcare.
