Learn how to use your tax refund wisely and avoid financial headaches.
Tax refunds are the most (fine, the only) exciting part about doing your taxes. How do you plan to use yours? Even if you’re itching to spend it on something luxurious, take some time to review how to use your tax refund wisely. Your debt needs you. And your savings account could use some love.
Haven’t filed your taxes yet? Follow our guide that covers how to file taxes. You only get to use your tax refund if you file first!
NOTE: A large tax refund isn’t always a positive thing. If it seems overly large, your employer may be withholding too much from your paychecks. Even though it’s always nice to get a little gift for tax season, it can be better to have that money back month-to-month during the year.
Method 1: Use your tax refund to pay off debt
Paying off your debt with your tax refund is the wisest thing you can do when you get that check.
Whether you have credit card debt, student loan debt, or you’re behind on any other payments, the absolute best use for your tax refund is paying back your lenders. No, it’s not the most fun thing to spend your money on. But in the end, you will have more financial freedom.
When you use this method, make the payment as soon as possible. Otherwise, you will owe more interest on what you could have paid off quickly with the refund.
Method 2: Save your tax refund
The best home for your tax refund may just be in the bank.
Can you hear that? It’s your savings account calling. It’s been a long time. If you are one of the lucky people without serious debt issues, saving your tax refund is the second-best option for your tax refund. Even if you do have debt, it’s beneficial to put away at least some of your refund for emergencies so you don’t dig yourself further into debt in the future.
If you don’t have a savings account already, shop around for one with a high interest rate and low fees. You want your money to make money, not just sit there!
Method 3: Use your tax refund to buy a home
Your tax refund might give you the boost you need for a down payment on a new home.
If you’re having trouble qualifying for a mortgage loan because of debt, refer to method 1. If not, consider using your tax refund to help with closing costs on a new home. Down payments and closing costs can be some of the biggest obstacles between you and your dream house, so take advantage of a large tax refund when you get it.
Although using your whole tax refund on a down payment may help in the future, keep some for yourself if your budget is tight now or if you have no emergency fund.
Method 4: Use your tax refund to buy a car
If you’ve been looking for a new car, your tax refund could help you finally purchase it.
First, wait for your check to arrive. You’ll want to have an accurate budget in mind when you start looking. Next, use a car affordability calculator to figure out how much you should be spending on a vehicle. Once you have a budget, you can start seriously looking.
When you’ve found the car for you and you’re ready to make a deal, you have a choice to make regarding your tax refund. You can
- use it for a larger down payment that will reduce monthly payments
- pay a smaller down payment and use the refund toward larger monthly payments
- or make a principal payment to get lower interest
If you decide to just use your tax refund for monthly payments, keep your monthly budget in mind. Once the refund well has run dry, will you have enough to cover the payments?
Method 5: Invest your tax refund
If you’re more of an adrenaline-junkie or you like to play the long game when it comes to money, invest your tax refund.
As long as you aren’t afraid of a little risk or a long wait, this could really pay off. Have questions about investing? Take a look at our article titled “7 Simple Principles to Invest Your Money Wisely No Matter Your Age.”
Wondering if you should skip paying your debt in favor of using your tax refund to invest in the stock market? Take it from Howard Dvorkin, CPA: “You’ll have more money at the end of the day if you use the extra cash to pay down debts that are charging you interest.”
Don’t put all of your tax refund investment eggs in one basket. It’s important to diversify.