Last Updated October 24, 2020
Did you get a tax refund this year? If so, you may be wondering what to do with your tax refund. Find out 10 smart things to do with your tax refund money. This list is in order of most important to least important uses of your tax return.
What To Do With Tax Refund
1. Fully Fund Your Emergency Fund
One of the best things to do with a tax refund is to make sure you have a fully-funded emergency fund. An emergency fund is money set aside to cover large unexpected expenses or to help you through hard financial times—like a job loss.
The size of your emergency fund depends on your personal situation. I suggest an emergency fund that is at least three to six months’ worth of living expenses.
When I say “living expenses” I mean only necessities, such as rent and groceries. I don’t mean shopping, entertainment, dining out, or vacations.
However, no matter what your job situation is, I think everyone should have at least $1,000 set aside in case of an emergency.
Since an emergency can come at any time, it’s very important to have quick access to your money.
Therefore, I recommend you open a high yield savings account at an online bank. You get two benefits of banking online:
- They usually pay higher interest on your money than a brick and mortar bank; and
- It reduces impulse purchases because your money is a little harder to access. With online banks, it usually takes a few business days for the money to be transferred to a physical bank where you can withdraw cash.
A good online bank I like is Radius Bank. They offer competitive interest rates, has no monthly maintenance fees, and no minimum balance requirement after $100 to open. Also, their checking account has free ATMs worldwide.
If you want to learn more about emergency funds, you can read my detailed article titled “How To Build An Emergency Fund.”
2. Pay Down/Off High-Interest Debt
The next best way to spend your tax refund money is to pay off high-interest debt. Debt is a drain on your finances and slows down your achievement of financial freedom. I consider any debt with an interest rate above 8% to be “high interest.”
The reason why I would pay off any debt with an interest rate above 8% is because the stock market has returned about 8% over the long haul.
Paying off a debt with an interest rate greater than 8% is equivalent to getting a guaranteed return of more than 8% on an investment. Therefore, paying off your high-interest debt above 8% will most likely give you a better return on your money than investing in the stock market.
You can use the FREE Debt Worksheet to get organized and prioritize which bills you will pay first.
Sometimes having too many different bills coming in can certainly be overwhelming and hard to keep track of. Therefore, use the FREE Debt Worksheet to help you keep track of this.
Use These Debt Repayment Tools
If you’re like me, you like to use paper and software to help you with your financial journey. If you’re interested in using technology to help with your debt repayment plan check out Undebt.it.
Undebt.it is a FREE tool to help you get out of debt. There are SEVEN debt payoff plans you can choose from (including the debt avalanche and debt snowball method). You can even compare the different payoff plans to see which is best for you or make your own custom plan!
They also have debt payoff calculators, which is also FREE. You can keep track of all your payments and your debt payoff progress in one place. This software is so AWESOME and absolutely FREE! I haven’t come across something this good in a while!
You can also sign up for the premium account that has more features for you to take advantage of. The premium account is $12 for the entire year (only $1/month), which is still very affordable.
There’s a 30-day FREE trial if you want to check out the premium account. What I would do is sign up for the free account first, and then click on the free trial to check out the premium features. If you like it, then sign up for the premium account.
Speed Up Paying Off Your Debt
You can also use an app like Tally. Tally is the world’s first automated debt manager that makes it easy to save money, manage your cards, and pay down balances faster.
The way it works is Tally analyzes your credit cards and finds ways to help you eliminate debt and save money. If you qualify, Tally gives you a line of credit with a low APR, then uses the new credit line to pay your credit cards every month. The low APR helps save you money on interest.
Tally manages all your credit cards in one simple app. They keep track of the balances, interest rates, and due dates for each card. That’s how Tally makes the right payment to the right card at the right time. All you have to do is make one monthly payment to Tally.
Tally is free to download, and they don’t charge any fees to use the app. The way they make money by charging interest on the amount borrowed (which is a lower interest rate than what your credit cards are currently charging you).
I highly recommend Tally because they only make money if they can save you money.
3. Put Your Tax Refund Towards Retirement Savings
Another thing to do with your tax refund is to put it towards your retirement. As the generation of baby boomers enters retirement, the payroll taxes that they’ve contributed to the system throughout their careers will turn to withdrawals in the form of retirement benefits.
The amount of money that has been set aside is not enough to cover the long-term expenses of baby boomers that will occur. As a result, it is estimated that social security will run out of money by 2034.
That’s just in time for people around my age to get ZERO when we decide to retire. Therefore, it is imperative that you save for your own retirement and not expect to rely on the government.
If you’re a millennial like me, you might be putting retirement on the back burner because it seems so far away from now. But you should start saving for retirement as early as possible to take advantage of time and compound interest.
The sooner you begin saving, the more time your money has to grow and compound. Compounding is a powerful wealth-building tool because your interest gains interest.
For example, say you have $1,000 invested that gains 10% interest. At the end of the year, you will earn $100 in interest and have a total of $1,100. If you don’t touch that money and allow your interest to compound, you will earn 10% on $1,100 (not $1,000); therefore, at the end of year two, you will earn $110 in interest.
Finally, saving for retirement is even more important if your employer matches contributions to your 401(k) or similar plan. If you don’t you’re leaving FREE money on the table!
4. Put Your Tax Refund Towards Other Financial Savings Goals
Do you have something, in particular, you’re saving for? Maybe it’s to save up a down payment to put towards a house. A smart way to use your tax refund is to put it towards a big savings goal you would like to accomplish.
Again, I would recommend you keep your savings in an online bank like Radius Bank. They offer competitive interest rates and your money will be held in a safe place until you’re ready to use it.
5. Invest Your Tax Refund
One of the best things to do with your tax refund is to invest it. I’m a firm believer that you should be investing your money and not just saving. If you don’t invest your money, and only save it in a savings account or CD, your money is eroding every year thanks to inflation.
Historically, the stock market and real estate have offered better returns on your money than if you were to save it in a bank account.
I personally use Robinhood.com to purchase individual stocks. This website is great because you can buy and sell stocks for free—there are no commissions or fees. Most other brokerage firms charge at least a $4.95 fee per trade, and some have hidden fees.
Sign up today and you and I can get a free stock like Apple, Ford, or Sprint. With Robinhood you also don’t need a minimum account balance, so you can get started right away.
If you are new to investing in the stock market and want to learn more, read my article “Best Ways To Invest In The Stock Market For Beginners.”
6. Use Your Tax Refund To Start A Business
If you’ve always had the dream of being your own boss, consider starting a business. Your tax refund can be the boost you need to get your business off of the ground. Take advantage of this windfall of cash and take your business to the next level.
You can use your tax refund to buy the tools you need to get started, build up inventory, go towards tuition for courses tailored to your business, or anything else that will turn your hobby into a business.
7. Put Your Tax Refund Towards Your Child’s College Fund
If you have children (and have already fully funded your emergency fund and retirement account), you may want to start saving up for their college fund.
The cost of education is growing at an alarming rate. Therefore, your child will probably need as much help as they can get so they’re not drowning in student loans later. Setting up a 529 plan can help your child afford higher education later in life.
8. Use Your Tax Refund To Pay Down Low-Interest Debt
You can use your tax refund to pay down any low-interest debt you may have. For example, you can make some extra payments to your mortgage or student loans.
These extra payments will reduce the principal balance you owe, and can make a big difference in how much you end up paying the bank in the future.
9. Donate Your Tax Refund
Went through the list and you still don’t know what to do with your tax refund? Consider donating it. Sometimes your budget is so tight that it is hard to make charitable or religious donations. Therefore, this is usually on the bottom of our list of priorities.
Your tax refund can give you a chance to give something back. So if you felt bad you couldn’t donate to a great cause earlier in the year, now is your chance to make up for that.
9. Use Your Tax Refund To Treat Yourself
Finally, if you have taken care of all your other financial obligations on this list, and still have money left over, I think you should go ahead and treat yourself! You saved all year and made sure your money is right, so don’t feel guilty and treat yourself to something nice.
Just make sure you don’t get carried away!
Sometimes it’s hard to figure out what to do with a tax refund. Regardless of how much you get from your tax refund, you want to make sure you’re spending it in a smart way. There are so many great things to do with your tax refund.
First, you should be putting this extra money in a place where it can work for you, and allow you to get closer to your financial goals. Once that is taken care of, you can donate the money to a charitable cause. You can even treat yourself!
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