6 Smart Ways To Use Your Tax Refund This Year
Tax season. One of my favorite and least favorite times of year, and I’m sure many people would agree.
It’s one of the biggest annual “bonus checks” I’ll receive this year.
Compiling tax information and going through the actual process of filing can be tedious, but once it’s all said and done – and there’s a tax refund check on its way in the mail – it’s exciting to think about how to allocate the money.
It’s easy to daydream about taking a grand vacation, buying a new TV or another large-ticket item, but is that what you really want to do?
Eye-Opening Tax Stats
70% of Americans expect to receive a tax refund each year, while 30% do not.
$2,782 is the average tax refund for taxpayers filing 2017 returns.
I was recently chatting with a friend about our tax refund plans, and while the conversation started out fun, it ended with a huge reality check.
Me: “What are you going to do with your tax return?”
Friend: “Still trying to figure it out. How about you?”
Me: “I don’t know, maybe spring for a new wardrobe or put it towards my dream European vacation.”
Friend: “That sounds amazing. I’ll probably do something boring with my return, like pay off my car. I’m so close!”
And just like that, my friend’s plans to be responsible by paying off her car with her tax return brought me back down to earth. All the times I was short on money last year and vowed to be responsible with this year’s tax return resurfaced and I knew I needed to rethink my plans.
That’s not to say there isn’t room for a little bit of both fun and responsibility – there are plenty of ways to incorporate both.
I like to plan ahead so I’m prepared as soon as I get my return, so I’ve brainstormed a list of 6 ideas to consider before that money starts burning a hole in your pocket.
1. 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. I still vividly remember making the last credit card payment to become debt-free and it was like a downright celebration.
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 it completely, it’s definitely a step in the right direction and will feel like a weight has been lifted off your shoulders.
2. Buy Something You Need
Is there something you really need but have put off because it costs 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 finally time to upgrade your phone with the smashed screen. Maybe it’s time to finally get that dental work done that you’ve been putting off.
Last year, I replaced my 10-year-old laptop with a new computer thanks to my tax return, and it immediately made a huge difference! I use it literally every day for work and have become much more productive with my time simply because it’s faster and can handle what I need it to do.
3. Start Building An Emergency Fund
What would you do if you found yourself in a position with no income or considerably less income all the 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, and while I agree that it’s solid advice, I’d say even if you can’t set aside that much money right now, every little bit helps and is better than nothing at all.
4. 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.
I only recently started getting into investing and it’s solely because there are finally companies who make it easy to understand all the finance mumbo jumbo.
Stash is a micro-saving app known to be especially user-friendly for first-time investors. I like that 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 – even just $5. They’re so helpful and will even give you a $5 bonus to get started.
Wealthsimple is another platform that sparked my interest because it’s easy to use and they’re a socially responsible company. Without getting too into the nitty-gritty, they make it easy to put money into a Traditional IRA and/or Roth IRA, and all accounts with a balance under $5,000 are managed for free with excellent customer service.
If you’re like me and have always wanted to invest in real estate, but weren’t sure where to start with limited funds, Fundrise might be just what you’re looking for. They’ll 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, I know that by starting now with whatever I can, I’ll have decades to ride it out before I need to access the money.
5. Go Halfsies: ½ Fun, ½ 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 my favorite win-win decision and exactly what my husband and I plan to do with our return this year.
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
Me? I’m putting half of my return into savings and spending the other half on a king-sized bed to finally have enough room to spread out and relax!
6. Try Something New
If you’re already a super adult with everything in order and no debt to pay off and no immediate needs to add more to your savings and/or retirement accounts, then congrats and high-five!
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, 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 towards new experiences, I highly recommend it! They say money can’t buy happiness, but maybe it can (a little).
Images via Pixabay unless otherwise noted.