The 10 Best Ways to Use Your Tax Return
I may earn some coinage for my piggy bank or products from the companies mentioned in this post. Please see my disclaimer for more information. Thanks for your support!
Ohhhh, the temptations!
If you’ve got money headed your way at tax time, you might have dreams of a Disney vacation, new kitchen appliances or a theater room upgrade dancing around in your head.
What should you really do with your tax refund? And can you resist the temptation of the cruise you’ve been dreaming of while you try some more practical approaches how to spend your money.
Let’s take a look at what you should really be doing with that money.
The Ideal Tax Refund
Before we get into what to do with your tax refund, take a step back and note how much you are getting. If you are getting thousands of dollars back, the first and best idea is to reevaluate your withholdings.
Ideally your tax refund should be slim to none. You also should not be paying at tax time. It can be a balancing act to get your withholdings right, so you may want to consult a tax professional. Instead of getting one lump sum of money once a year, you’ll increase your paycheck and can use that money each month for your immediate needs and savings.
That’s something to work on for next year.
Since you are getting a tax return this year, let’s take a look at the top ten best ways to use your refund.
1. Build Your Emergency Fund
You should have a minimum of $1,000 or 1 month of living expenses saved for an emergency, whichever is more.
This is your personal insurance policy against life’s dilemmas that show up in everyone’s lives. No one is immune. You’ll help protect from a financial disaster anything from health problems, mechanical failures in your home or car, or job loss.
If you have 1 month or $1,000 saved already and have paid off your debt, the next step is to get your Emergency fund up to 3-6 months of living expenses.
Related Article: 12 Helpful Tips to Build Your Emergency Fund Fast
2. Pay Off Debt
Do you already have a comfy emergency fund or your refund will more than cover your suggested fund amount? Take some money to put toward paying off some of your debt.
Sort your debt and decide which one(s) you can pay off the quickest.
Could you get rid of a credit card or two? If so, stop using those cards. Don’t go back into debt because you didn’t help yourself any if you reload the cards and start overspending all over again.
Related Article: Secrets to Paying Off Debt as Quickly as Possible
3. Save for Alligator Expenses
I can see your questioning look.
“Alligator expenses? What on earth?”
That’s my pet name for irregular expenses.
The reason I call them “alligator expenses” is because alligators are ambush hunters. They hide and stay lazily motionless where you barely notice them, until an unsuspecting animal tries to get a drink of water.
You know how it’s going to play out.
Irregular expenses ambush you the same way alligators do. They’re always there, but don’t show up on a regular (monthly) basis. You go about life and don’t think about them. The next thing you know, your car registration is due, it’s time for back-to-school, and the holidays are right around the corner.
You’ve been ambushed!
It’s a great way to break your budget.
To combat the alligators, I set up little mini-buckets (aka, sinking funds) where I take a small amount of money from each paycheck so that when it’s time to pay for a big expense, I’ve got the money to do it and it doesn’t affect my budget at all.
Pretty clever, right?
In the meantime, if you don’t have the per paycheck bucket set up yet, you can set aside money from your tax return to cover those expenses when they come up. Then, start saving for them each paycheck from now on.
4. Get Ahead on Regular Bills
I like to get ahead on my bills so that I know I won’t pay anything late and have some flexibility when something weird happens (can’t predict everything, can we?).
Getting a month ahead on bills is especially helpful when you are living on a variable income. It can help you iron out the roller coaster paycheck cycles.
Using your tax refund could be your ticket into getting ahead instead of constantly paying from behind or barely keeping ups.
Related Article: How to Budget and Get a Month Ahead with a Variable Income
5. Save for the Kids College Fund
If you’ve got kids at home who aspire to go to college, you (and/or they) have a huge expense looming in the not too distant future.
My oldest is 5. It sounds like college is a long way off, but let’s say college will be $30K for her. Even with a full 13 years to save up for it, I’d have to save $2,300 a year to be able to pay for her college. That’s a substantial amount of money, and who knows how much college will cost in 13-15 years.
She's not my only child, so I'll need to be saving a lot more than that to pay for even more college.
It’s a great idea to get started on the college fund as soon as possible. Ditch your debt then start saving for this all-important milestone so your kids don’t have to start off their adult life with a boat load of student loan debt.
One option would be to contribute to a 529 plan which may have tax benefits for you. Check with a professional provider in your state.
6. Invest in Your Future
You may want to use your refund to pad your retirement some more. Hopefully you are well into your retirement planning, but if not, take the opportunity to do some research and plan for your future.
On top of your 401(k), you can sink some money into a Roth IRA. You’ll find some great information on Roth IRA’s here if you aren’t familiar with them.
7. Start or Build a Business
Is starting a business on your bucket-list?
A brick-and-mortar business takes a lot of capital to get started, so a tax return probably won't cut it, but it would be perfect to polish your business skills and get an online business up and running.
Starting a business takes capital for both tools and resources. If you’ve only worked as an employee and want to transition into the world of entrepreneurs, there is a learning curve.
To start your new business, start by investing in yourself first with the education you need to succeed. This doesn’t mean you need to go to college per se, but read books or take online courses that will get you geared up and heading in the right direction.
8. Learn a New Skill or Hobby
Have you always wanted to take up photography, play the saxophone or start a beautiful garden?
If you have all your ducks in a row financially speaking, now might be a great opportunity to start that new hobby or learn a new skill.
It can be expensive when you first start, so this might be just the thing to use your extra money for.
9. Spend Some Fun Money
Aww, yes, that fun vacation just might make the list after all!
Having extra money is a blessing that might not come around very often. I strongly urge you to take measures to protect your family and your future first, but then, there may be room to splurge and have a little fun.
After all, there does need to be a little balance to life. Taking time to enjoy some pleasures can help.
Just don’t spend your entire return in this area. (Unless, like I said, everything else is already in place.)
I’d suggest taking 10% of your refund to enjoy with your family. It might be a small trip or an upgrade in your home that everyone can enjoy.
If your refund isn’t very big, (bless you for setting up your taxes the right way and keeping your withholdings closer to the right balance) try to do something small, like a date night or family bowling night to enjoy a little fun together.
10. Donate to Charity
What goes around, comes around.
I find so much gratitude in the ability I have to help bless the lives of others when I’m able to give to charity.
I’ve been the recipient of charity on many occasions and love that I’m now able to pay it forward and help others who struggle with a variety of trials.
Again, this doesn’t have to be a large portion of your refund (unless it’s what you love!) but consider reaching out and helping others in your family, your community or to a charitable organization.
I hope this list gives you some great ideas on how to divvy up that fat check headed your way. What have you done with your refund in the past? Do you feel you could use the money better? Are you going to try to even out your withholdings so you don’t need to rely on a refund. We’d love to hear your thoughts!