If you’re like the majority of U.S. taxpayers, you’ll soon have a tax refund check burning a hole in your pocket (if you haven’t received it already). What next? Using your refund wisely can accelerate your progress toward important financial goals. Here are our top suggestions to make the most impact with your tax refund.
1. Save It
A rainy day fund can be one of the most important steps to take toward financial security. Pew Charitable Trust research from 2015 found that 60% of families had experienced a financial shock in the last 12 months. What’s more, nearly half struggled to recover and make ends meet for at least 6 months after the unplanned expense. The median cost of the most expensive shock was $2,000, so this could be a good benchmark to aim for to protect your family against unexpected expenses.
2. Invest It
Saving for retirement gives you the best returns when you start early, thanks to compound interest. But saving in your early 20s can be especially difficult. A study from Navient found that workers aged 28-35 had a median salary almost twice as high as those aged 22-27. Investing your tax refund in a retirement account like an IRA can help you stay on track. (Also, consider talking to your employer about increasing your 401(k) contribution if you can, especially if you’ll get a match from the company.)
3. Put It Toward a Down Payment
If you have dreams of homeownership, you may be working to save a down payment. Credit.org’s mortgage readiness quiz can help you assess what steps might be right for you to get ready to house-hunt. People who aren’t planning to buy a home may still need a down payment for another purchase, like replacing a car. Saving thousands, or even tens of thousands of dollars takes time and planning. Your tax refund can push you toward the amount you need.
People who aren’t planning to buy a home may still need a down payment for another purchase, like replacing a car. Saving thousands, or even tens of thousands of dollars take time and planning. Your tax refund can push you toward the amount you need.
4. Fund Kids’ Education
Preparing for your children’s educational and financial future may be just as important to you as your personal goals. Like saving for retirement, putting money aside in a 529 or similar education savings account as early as possible can pay off. Plan for college before your kids are old enough to read, and you may find yourself better positioned to send your kids to a university of their choice later on. You may not need to rely on student loans or stress your own finances to pay tuition, benefitting two generations at once.
5. Pay Off Credit Card Debt
Credit card debt is one of the costliest forms of debt out there. High-interest rates inflate the amount you’ll pay credit companies, and the damage to your credit card score can affect other loan opportunities. Eliminating debt is an excellent use of your tax refund.
6. Repair Your Car
Does your car make a weird noise that you’ve let yourself ignore while money was tight? Now could be a good time to find a reputable mechanic. Your car is one of your most expensive possessions, and you may rely on it to get to work. Paying for repairs and maintenance may extend the life of your car and save you from having to shop for a replacement before you’re ready.
7. Maintain Your Home
Your home is another excellent place to invest a tax refund. Energy-efficient appliances and windows can save on energy costs. Neglected repairs can also grow into a larger (and pricier) problem to solve, so it can be smart to handle upkeep early, at a time when you can afford to pay out of pocket.
8. Go to the Doctor
Even if you have insurance, out-of-pocket healthcare costs can be difficult to manage. Your health is an even more important resource to protect than your car or house. If you’ve put off a doctor checkup or dental cleaning for financial reasons, consider using your tax refund to get the medical care you need.
9. Splurge (a little)
We’ve talked a lot about necessary expenses and major financial goals, but you don’t necessarily need to put all of your tax refunds toward bills. Reserving 10% of your refund for something memorable and fun can be a good motivator and reward for using the bulk of the money prudently. Make a plan before the check lands in your account so you can be intentional about the purchase.
10. Pay it forward
If you’re in good financial shape, consider donating to a local food bank or a cause you support. It’s not always easy to find room in the budget for all the causes you care about. This can be a great chance to support your wider community and feel the positive effects of giving.
It’s nice to get a cash windfall, but tax refunds aren’t free money. Your refund check effectively proves that you let the government borrow some of your paycheck, interest-free, for the better part of a year. If your refund was high, and especially if you had trouble meeting expenses during the year without going into debt, you might want to ask your employer about options for adjusting the amount of taxes withheld from your paycheck.