Tax season. To many, this is their favorite time of year. To others, not so much.
If you deducted more than was needed from your pay throughout the year, tax season can deliver one of the biggest annual “bonus checks” you might receive — even though it’s not technically a bonus since it’s your money you’re getting back in the first place.
Going through the actual process of filing your taxes can be tedious, but if you end up receiving a refund once it’s all said and done, it can be exciting to think about how to use the money. It’s easy to daydream about taking an exotic vacation, buying a new TV, or splurging at your favorite restaurants, but is that the best way to spend this money?
Eye-Opening Tax Stats
70% of Americans expect to receive a tax refund each year, while 30% do not.
$2,825 is the average tax refund for taxpayers who filed 2018 returns (as of Oct. 2019)
Instead of splurging on something you want, consider putting your tax refund towards something you need — or better yet, toward something that can help improve your overall financial situation.
That’s not to say there isn’t room for a bit of both fun and responsibility – there are plenty of ways to incorporate both. But planning ahead before you receive your tax refund can help you avoid the temptation to spend it completely frivolously.
To help you decide on the best way to allocate your refund, here are six ideas to consider before that money starts burning a hole in your pocket.
Say goodbye to credit card debt
38.1% of Americans carry some type of credit card debt, with an average of $5,700, so it’s no wonder this one tops the list. Credit card debt has some of the highest interest rates attached to it, so paying down your balance (if you have one) will benefit you in the long run. Even if you can’t say goodbye to your debt completely, paying it down is definitely a step in the right direction and will feel like a weight has been lifted off your shoulders.
Buy something you need
Is there something you really need but have put off because it costs too much money? Consider how you could use your tax return to fulfill your actual needs, not wants. Think of items you use every day or would use every day to better your day-to-day circumstances.
Maybe your car could use a tune-up or it’s time to upgrade your phone with the smashed screen so you don’t miss any work calls. Maybe it’s time to finally get that dental work done that you’ve been putting off.
Even a new computer, while it might sound like a “want,” can make a huge difference if you use it for work. A newer, faster computer can lead to more productivity, and if that’s something that will help your situation, go for it.
Start building an emergency fund
What would you do if you found yourself in a position with no income or considerably less income all of a sudden? Call it what you want — rainy day fund, I-didn’t-plan-for-this-fund, etc. — but an emergency fund will give you peace of mind on another level.
Experts will tell you to save up enough money in your emergency fund to cover at least six months of living expenses. While that’s solid advice, even a little bit helps and is better than nothing at all. If you don’t have any savings set aside for emergencies, consider starting with your tax refund. It might not be fun, but it’s responsible and you’ll be glad for it when you need it.
Invest in yourself
It’s impossible to know what the future holds, but one thing is certain — having money grow passively in the background for whenever you need it is always a good idea. Getting into investing can be intimidating, but modern technology is making it easier to make this valuable financial move.
Stash is an investment tool known to be especially user-friendly for first-time investors. It’s easy to sign up, and you can add money to your account as little or often as you’d like in increments that make sense for you. With as little as $5, you can start investing and building your portfolio. You can even learn a thing or two about investing along the way.
Wealthsimple is an investing platform that stands out as being easy to use and they’re a socially responsible company. Without getting into the nitty-gritty, they make it easy to put money into a variety of personal investment accounts like a Traditional IRA and/or Roth IRA. All accounts with a balance under $100,000 incur only 0.5% in fees. There are no fees for trading, account transfers, or rebalancing.
If you’ve always wanted to invest in real estate but weren’t sure where to start with limited funds, Fundrise might be what you’re looking for. This online real estate investing firm will walk you through setting up a simple Starter Portfolio and you can start investing for just $500 (nearly unheard of in the real estate industry).
Even with the ups and downs in the market, when you start as early as possible and with whatever money you can, you’ll have more time on your side to grow your portfolio and see your investments pay off. Using your tax refund to invest in your future is a wise choice no matter how much it is. As we mentioned, even just $5 is enough.
Go halfsies: half fun, half responsible
Make your mama proud (or whoever you’re trying to please in life) and indulge in something fun by going halfsies with your tax return. It’s a win-win decision and allows you to enjoy some of your hard-earned money while also being financially responsible.
Some ideas for you:
- Throw half into your Roth IRA, then pounce on an airfare sale to your favorite vacation spot
- Get new tires and an oil change for your car, then go on a road trip to celebrate
- Pay off your credit card, then get an Instant Pot because everyone is talking about them and you’ve wanted one for over a year
- Make an extra student loan payment, then buy tickets to an upcoming show or concert you want to attend
Whatever it is, enjoy yourself. You should be able to get even more pleasure out of whatever you choose to spend your money on when you know you’re also putting some of your refund toward a better financial future.
Try something new
Your options for allocating your tax return are endless, so consider this: When’s the last time you tried something new? Not “new” as in a new restaurant, but something more substantial. Like, perhaps, taking a cooking class or pottery class?
Or, something like spontaneously heading the airport with a small carry-on and buying an airplane ticket? Maybe there’s a charity you’ve always thought about donating to but haven’t yet.
Research shows spending money on experiences, rather than tangible items, improves our happiness. So if you’re able to put money toward new experiences, it’s highly recommended. They say money can’t buy happiness, but maybe it can (a little).
Bottom line on maximizing your tax refund
It’s easy to see a tax refund as extra spending money, but this usually isn’t the best way to use it. If you absolutely must spend some of your tax return on something that will send your dopamine and serotonin levels through the roof, consider allocating some of your refund toward something that will benefit the future you as well.
If you’re due a tax refund, remember that it’s actually money you overpaid throughout the year. So while it might feel like a big bonus check, it’s money you could have otherwise held onto, stuck into a high-yield savings account, and earned interest on until taxes were due. Consider the benefits of what you can do with that money to improve your financial situation before you turn around and spend it all.