7 Smart Things to Do with Your Tax Refund
Tax season takes us through the full cycle of finances: we review our income, pay out what we owe, and then collect what we’re due. It can also be an emotional and fretful time.
But, once we get the hang of it and understand our financial standing, we can start to gauge not only what we owe Uncle Sam, but what he’ll give back to us in the spring.
Being able to plan ahead opens the door to a wide variety of smart things to do with your tax refund. Some of these ideas aren’t quite as exciting as that trip to Aruba. But, let’s have a look at all the options anyway.
Save It
This is, undoubtedly, the least exciting option. To just receive your refund and then move it over to a savings account can be the least gratifying experience.
But, what if it was part of a greater scheme? People who are trying to get out of debt often follow Dave Ramsey’s course, Financial Freedom. He offers invaluable advice. But, the long and short of his plan is this:
Save $1,000.
Pay off all your debts, from smallest to largest.
Save three to six months’ salary.
Of course, there’s much more to it than that. And he goes into great detail throughout his course. But, that’s the loose plan.
What if that refund of a couple hundred dollars (or, even better, a couple thousand) was part of a master plan that you’re excited to embark upon?
When wondering what to do with your tax refund, this instantly makes it a lot more gratifying than an aimless slide over to savings with no master plan in mind.
Pay Down Some Debt
Again, not the most thrilling option. But what if it was part of that master plan? What if, in an ideal world, that one tax refund could chip away or eliminate your smallest debt?
Ramsey’s course calls this strategy snowballing. It seems counterintuitive, but when tackling debt, it’s best to start with the smallest account and then move over to the largest.
This provides an enormous sense of accomplishment which quickly turns into momentum and keeps us on course. If you start with the largest debt, it can feel like you’re getting nowhere and you might even give up. But, snowballing is a proven recipe for success.
Let’s say that one refund check could knock out your smallest credit card. Imagine that. In your snowballing spreadsheet, you can quickly check off the first problem area and then start chipping away at the next.
It’s a tremendous way to start out the year, especially if financial fitness is one of the new year’s resolutions you’re planning on keeping.
Invest In Your Retirement Fund
If you have an IRA or similar retirement fund, you know that the more you have in there, the more opportunity you have to increase your bottom line.
Interest rates and the market can help you grow your portfolio at a faster rate than an average savings account. Take this opportunity to better-position yourself and see if the market looks favorably upon your bottom line this year.
If you have an employer-provided 401(k) plan, take the same approach. As you know, most retirement plans accept pre-tax funds. So, why not take the returns from your taxes and add it to one of your most valuable prospects: your future.
Invest In Yourself
Are you resolved to start a side hustle this year? Or, is there some sort of course you’d like to take to develop a new set of skills? When wondering what to do with a tax refund, this could be one of the most fruitful options.
There’s no better way to invest in yourself than the residual fruits of your labors: your tax refund. It’s literally the result of a year’s salary that you worked hard to earn.
So, why not plant that check into something that will grow and flourish?
If you’re ready to start a side hustle, use your tax return to purchase whatever it is that will set you up for success.
If you’d like to start a YouTube channel, maybe you’ll invest your return in camera equipment or editing software. If you’d like to sell your art on Etsy, perhaps you’ll invest in new materials to bring your creations to life.
Similarly, if you’d like to learn a new skill to achieve some future goal, use your refund to enroll in a course. Take that videography course at your local community college so you can create cinematic sensations on YouTube.
Or, what if you have a more personal goal?
Perhaps you’d like your short stories or essays to be published in the coming months. Enroll in a writing workshop that will help you make your writing your focus while you receive meaningful feedback that will help you grow.
Take a Vacation
What if you’re incredibly savvy with your money, have little to no debt, and already have a beefy retirement fund?
Then, you’re one of the lucky ones that can look into new ways to spend your tax refund on something truly spectacular.
There are two impediments to large travel plans: they cost a fortune and they eat up all your PTO days. So, in a way, if you use your tax refund to plan that trip to Aruba, you’re not digging yourself deeper into any holes.
With a healthy bank of PTO days, you can put your return towards the trip of a lifetime. Ideally, your refund will cover the entire cost of the trip.
But, even if it doesn’t, you can still set that money aside until you’ve saved the rest of the funds to cover your airfare, accommodations, and spending cash.
Invest In Home Improvements
When a major appliance goes kaput, it immediately takes a bite out of your income and savings. The refrigerator, the washer, the dryer, the dishwasher… each of these appliances aren’t quick and easy purchases.
When you consider the fact that tax refunds come around in the spring, it’s wise to keep an eye out for Memorial Day and Labor Day sales.
In this regard, you can use funds that won’t reduce your bottom line and roll it into some major cost savings if you land on the perfect deal from one of the big box stores.
Our homes are one of the few things in life that appreciate over time. Any investment made is likely to pay itself forward, year after year. And this doesn’t even have to be something enormously practical like a new refrigerator.
What if you’re in a position to set up that new veranda in the backyard?
Using your tax refund to build out an area of your home that you’ve been excited to expand is a wonderful way to watch your tax refund bring something tangible to life.
Donate It
Most of us have a heart for charity. We wish we could donate to the local shelter or the adoption agency that gave someone we know the gift of a lifetime.
Yet, when things like inflation and interest rates keep burying us, those good intentions are often the first things to go.
When you think about it, we could live with or without our tax refunds. Yes, we’re grateful when we experience the sensation of being given something by Uncle Sam. But, we can’t often work our budgets around a return that tends to fluctuate year over year.
If you’re in good financial standing, why not use the opportunity to donate your refund to the causes you support? Is this not one of the best ways to use your tax refund?
You can put the whole check towards an organization that really needs your help. Or you can spread the love to a few different worthy charities. The end result is a wonderful feeling of accomplishment that may only come around once a year.
There Are Many Smart Things to Do With Your Tax Refund
Indeed, there are countless smart things to do with your tax refund. You can use it to accomplish a major goal, like digging out of debt. You can invest in your future and overall peace of mind.
Or, you can reward yourself for having survived a tough couple of years and take that vacation you’ve been dreaming about. In the end, the main goal is to use it to create a life that’s purpose-driven, rewarding, and as debt-free as possible.
Whichever way you go, may it be fulfilling and pay itself forward in countless dividends.
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