If tax season gives you anxiety, you’re not alone. In a recent study by LendingTree, an online lending marketplace, 54% of all respondents said they dread doing their taxes.
But filing your taxes may come with one exciting reward: a juicy check from Uncle Sam.
While it’s not technically free money (it comes from overpaying on your taxes), getting a refund check that’s worth a couple of thousand dollars — or even a few hundred — feels great.
However, it’s super easy to spend that money on frivolous things (last year I spent a chunk of mine on a tattoo, for example), but using that money wisely can help you get ahead, financially speaking.
1. Build an emergency fund
“Life happens and unexpected expenses occur,” Ashton Lawrence, a financial advisor at Goldfinch Wealth Management, a multi-state financial and retirement planning firm, says.
“If people don’t have the funds to pay for those unexpected expenses, this can result in taking on debt.”
That’s why he recommends using a portion or all of your refund (depending on your financial circumstances, of course) in a savings account. Having three-to-six months’ worth of expenses saved up is typically the go-to rule for anyone in the personal finance industry.
Read more: Emergency Funds: Everything You Need To Know
You have a few options when it comes to a savings account to store your emergency fund in. You can open one through a credit union or a larger bank, or you can opt for an online savings account. Online accounts, aka, high-yield accounts do exactly what they sound like they do: offer a much higher yield on your savings than brick-and-mortar accounts.
You can find the right account for you in our article: Best High-Yield Savings Accounts Compared.
2. Pay off debt
This is likely your least favorite suggestion since none of us want to think about our debt. But if you have high-interest debt you’re better off spending your refund check paying off debt, as this will allow you to free up more of your income and save more money, Lawrence says.
This is especially true if you have credit card debt or private student loans, as these tend to carry higher interest debts when compared to other lending products.
Paying off debt can also improve your credit score and your debt-to-income ratio or DTI, which is a percentage that measures how much of your monthly gross income is compromised by your debts, and is the metric most mortgage lenders use to approve you for a loan. So, if you’re in the market for a house, this could do wonders for you.
You’ll predominately hear about two debt-payoff strategies: snowball and avalanche, so take your pick and get started!
- The snowball method involves paying off your debts from the smallest balance to the largest balance. This gives you some momentum and helps keep you motivated to keep paying off your debt.
- The avalanche method, on the other hand, involves paying off your debt that has the highest interest rate first so you don’t pay way more in interest than you need to.
Read more: Kick Debt’s Butt! How To Get Out Of Debt On Your Own
3. Boost your credit
If you’re looking to build credit, getting a secured credit card can boost your score rather quickly.
A secured credit card works like a traditional credit card, but you must put down a cash deposit before you can make charges. In most cases, that deposit becomes your credit limit (you can read more about secured credit cards here).
Some cards offer a higher limit with a lower down payment if you have decent credit (aka a score of 680+). The Platinum Secured Credit Card from Capital One, for example, offers a $200 credit line if you pay a down payment of $49, $99, or the full $200 — it all depends on your credit.
Besides making a down payment, some secured credit cards require an annual fee. Although these fees are typically low, it’s worth keeping in mind.
As you make your monthly payments, the credit card company will report them to all three major credit bureaus (Experian, TransUnion, and Equifax), and you’ll see your score tick up as long as you pay on time.
Opening up a secured credit card might not sound like the most exciting thing to do with your tax refund, but for those without credit history or who are looking to rebuild their credit, it can be a huge gift to your future financial self. And, while you are at it, you could even tuck away another chunk of your return to cover some, if not all of your monthly payments.
Read more: How Long Does It Take To Build Credit From Nothing?
4. Put money towards your retirement account
Lawrence, from Goldfinch Wealth Management, says that one of the best ways to spend some or all of your tax return money is putting it toward your retirement account, especially a Roth IRA, which are easy to max out (with contribution limits of $6,000/year).
“This will allow the funds to grow tax-deferred and qualified distributions to be tax-free.”
If you don’t yet have a retirement account, here’s our beginner’s guide to saving for retirement. And to learn more about Roth IRAs in particular, check out our article: Roth IRAs For Young Adults: Why Starting Early Pays Off.
5. Use it to fund a major purchase
Okay, if you’re one of the lucky few who don’t have debt and have a good thing going on with your savings, then you can stash some of your extra money into your bank account (a high-yield account, of course) to help you save for a bigger purchase, like a house or a car.
But if you want to see your money grow a bit more than it would in a bank account — and don’t foresee needing it in the near future — you can also put the funds away in a certificate of deposit (you can find the best CD rates here).
To get a full step-by-step guide on how best to save for a big purchase like a house, take a look at our article: How To Best Save For A Down Payment On A House.
6. Give your home or car some TLC
If you’ve been putting off some much-needed home improvements, like fixing a leaky roof or upgrading your bathroom or kitchen, now may be the perfect time to get some of those fixed.
This will not only improve your quality of life but can potentially increase your home’s value. In other words, it’s a win-win.
Another great way to spend your tax return money is using it to repair your car. According to a recent survey by Ally Financial, Americans spent close to $2,000 over the course of five years in car repairs, while nearly 4 in 10 said they would not be able to cover an unexpected expense of $400 without having to sell something or go into debt.
So, if your car’s dashboard looks like a Christmas tree, you may want to use your check to give it the maintenance it needs.
7. Invest
If investing your tax refund in a retirement account is a little too boring for you, there are other investment options for you to consider.
You can go the traditional route and invest in stocks or mutual funds. Or, you can invest in the following, more unique, options.
Open an automated portfolio with a robo-advisor
Investing is complicated and most of us just don’t want to think about it. Luckily, in our technological age, we don’t have to.
Robo-advisors are diversified account investors that use a complex algorithm to best manage your investments. Note that you will need to pay fees for the robo-advisor, but those fees will be substantially lower than fees you’ll pay for a financial advisor. Your tax refund will be more than enough (depending on your income and the size of your portfolio, of course) to cover the fees.
You can find our top robo-advisor picks here.
Real estate crowdfunding
Real estate crowdfunding is similar to other crowdfunding (think GoFundMe), except they offer investors the opportunity to lend money to other investors looking to purchase real estate.
Crowdfunding as a whole is growing, and there are a few reputable companies that allow you to invest in real estate for just $1,000.
Fundrise, for example, is a company that started back in 2012 and has a minimum investment of $1,000. They offer commercial real estate investments such as apartments and office buildings.
Bitcoin (and other cryptocurrencies)
While we definitely don’t advise that you invest all your money in cryptocurrencies, we do want to present you with the information you’ll need in case you decide to take that route.
Bitcoin is still on the rise, so you could actually make a pretty webtradetalk.com Reader by buying it when its price is down (or taking a dip), and then selling it as its price surges, which is what many people do.
But be warned, investing in cryptocurrencies can be a risky business as they are extremely volatile and can gain or lose a lot of value within a matter of hours.
Read more: How To Invest In Cryptocurrency: A Beginner’s Guide
Open an active investment account
If you’re into a more hands-on approach when it comes to investing, then an active investment portfolio may be a good choice for you.
With an active investment portfolio, you can choose your own investments, whether its stocks, bonds, mutual funds, or exchange-traded funds (ETFs), among other options. This also allows you to be pickier about the companies whose business you want to support.
8. Invest in yourself
Are you craving a career change but don’t know where to start? Or maybe you want to climb the career ladder but lack the skills.
If that’s the case, then you may be better off using your refund to attend a boot camp, get a certification, or take a stackable credential to help you further your career.
Although some courses can cost a couple thousand, platforms like edX and Coursera offer affordable courses in the low hundreds, and even free ones you can check out.
9. Start a business or upgrade an existing one
The pandemic brought with it a small business boom. Last June alone, Americans started over 440 thousand businesses, according to NPR.
So, if you’ve been wanting to become an entrepreneur for a while, you can use your tax return cash as seed money to start financing your new venture (whether that be starting a freelancing career or a brick and mortar store).
Likewise, if you already have a business and your equipment is getting kind of rusty, or your website could use some help from a designer, that’s also a smart way to invest your money.
Read more: How Do You Know You’re Financially Ready To Start A Business Full-time?
10. Support a cause that’s close to your heart
In the unlikely event that there isn’t anything you want in this world nor do you have any debt to take care of, another great use for your refund check is to donate part of it — or all of it, if you’re feeling extra generous — to a charity of your choice.
Besides helping others and building good karma, you can use this to your advantage, as the IRS allows taxpayers to deduct these contributions. However, the charity you choose must meet the IRS’ eligibility requirements for you to make that move, so make sure you check with the entity first, if you’re planning on taking advantage of this over the next tax year.
Read more: You’re Not Too Broke to Give to Charity (And 4 Other Reasons to Give)
Summary
Getting your tax refund can feel like free money, but it’s not. You actually worked pretty hard for it.
Whether you invest, save, use it to improve your home, or to pay off debt, the most important thing is that this tax season you use your money wisely and don’t throw it away on things you don’t need.
Featured image: IhorL/ Shutterstock.com
