If you got a tax refund this year, you may be tempted to spend it on something fun. And, there’s certainly nothing wrong with that.
But before you get too impulsive, you may also want to think about how that refund might be able to help you get to the next level in life. In fact, smart use of your tax refund check may draw you closer to your short- and long-term financial goals.
What follows is a mix of smart, practical, and also fun, ways to spend your tax refund.
How Should I Spend my Tax Refund?
With the average taxpayer getting a refund of roughly $3,000 each of the past several years, you may have a nice lump sum of money to play with. Here are a whopping 41 “how should I use my tax refund?” ideas to consider.
1. Unloading Your High-Interest Debt
If you have credit card or other high interest debt, a tax refund can be a great way to reduce your balance, or even wipe it out completely.
Doing this will help you stop throwing money away just on interest charges each month. And, if you manage to wipe out that debt completely, you’ll have one less financial responsibility to deal with each month.
2. Starting an Emergency Fund
How are you fixed for life’s unexpected emergencies? If you were to lose your job, would you have about three-to-six months of living expenses at the ready? How about a car or home repair? Taking that tax refund and stashing it away for emergencies may save you in a pinch. Your future self may thank you.
3. Saving for Your Kid’s College Education
If you have kids, using your tax refund to start a 529 college savings plan could be a great first step toward dealing with the rising cost of college education. Money in these funds grows tax-free.
Additionally some states and 529 savings plans enable you to deduct your contributions from your state income taxes, so these contributions could save you tax dollars in the future.
4. Improving Yourself
When you get your tax refund, you could use it to make yourself more marketable to future employers. That could mean investing in additional or new career training, attending conferences, joining professional organizations, earning an MBA, or pursuing networking events.
This could all work toward creating a new you, and possibly a bigger paycheck with bigger tax refunds in the future.
5. Planning for Retirement
Does your company offer to match your retirement savings in your 401(k)? If so, you could take advantage of this “free money” by increasing your contributions with your tax refund. Doing this can maximize the benefit your employer offers.
If you don’t have a 401(k), you could use your tax refund to start an Individual Retirement Account (IRA), or add to an existing one, keeping in mind that there are annual limits to how much you put into a retirement account each year.
6. Becoming a Homeowner
You could also use your tax refund to help fund or boost a down payment on a new home. Offering a larger down payment will reduce your mortgage, which means you’ll pay less in interest. That can translate into lower monthly payments and paying less for the home overall.
7. Making Much-Needed Repairs
Already own? You might consider using your refund to make repairs and/or upgrades that could make your home more functional and also more re-sellable.
8. Starting an Investment Plan
If you’ve been putting off any serious investing until you have some available cash, now might be your chance. Of course, it’s a good idea to do your research first, but now could be the time to ramp up your savings to accomplish short or long-term financial goals.
9. Paying Monthly Fees Up Front
Do you have subscriptions to streaming services? How about a gym membership, or a phone app subscription? If possible, you could pay the annual fee in one fell swoop, which is often cheaper than paying month-to-month. It will also mean one or two less bills to pay each month.
10. Gifting a Loved One
The IRS sets a limit on the gifts you are able to transfer to family members and others without having to pay a gift tax. As of 2021, that limit is $15,000 per recipient.
This means that you can send up to that much without triggering taxes for the person you are gifting.
11. Going on Vacation
If you’re thinking about what to do with a tax refund that might also be fun, consider taking a trip with some of the money. Then, you won’t get stuck paying for your vacation on a credit card like you might have in the past–and potentially paying even more due to interest charges.
12. Buying Things That Will Save You Money
If only you had a smart thermostat in your home, you could save on your electricity, A/C, and heating every month. Or, if you got a good oven, you would cook more and wouldn’t eat out as much. If you purchased a set of weights, you could cancel your expensive gym membership. You may want to think about ways you can spend your tax refund that will end up saving you money on an everyday basis, and then make those investments.
13. Making Appointments You’ve Been Putting Off
When thinking about what to do with your tax refund, you might consider spending it on services that you may have been delaying but could improve your life. For instance, if you’ve had some back pain and need to get it checked out, you could use the money to your doctor or chiropractor. Using your tax refund to take care of yourself is always a good idea.
14. Funding Your Business Idea
Have you always wanted to start a small business? Then now may be the time. When you’re thinking about what to do with a tax refund, you might want to put it towards getting your business up and running. You may be able to avoid taking out high-interest loans to start your venture.
15. Donating It
If there’s an organization you believe in and want to support, you might consider donating your tax refund to that group. You’ll not only be doing good, but may also be able to deduct your donation on your taxes next year for a win-win.
16. Making Extra Mortgage Payments
If you’re contemplating what to do with your tax return, you could always make extra payments towards your mortgage (making sure it goes toward the principal, not interest). Reducing your principal can help you save significant money in interest over the long haul.
17. Purchasing Life Insurance
Signing up for a term life policy when you have the resources to do so can be a smart idea, especially if you are married and/or have children. That way, you will know that your loved ones are protected should anything happen to you.
18. Hiring an Estate Planning Attorney
This is another way you can plan for the future. If you have a spouse or young children, an estate planning attorney can help you devise an estate plan that protects them in the event that you pass away. This could include designating guardians and setting up a trust for your children.
19. Purchasing Renter’s Insurance
While your landlord is protected if something happens to their property, you are not. If you’re thinking about what to do with your tax refund that could save you money in the long run, you might consider buying a renter’s insurance policy.
This kind of policy will cover the cost of your belongings should anything happen, and also protect you if someone gets injured in your home, since they can make a claim with the insurance company instead of coming after you.
20. Paying for a Subscription-Canceling Service
A subscription-canceling service like Truebill can help you figure out which subscriptions you can cancel, as well as negotiate with your service providers to lower your monthly bills. The fee for this service can ultimately save you money–not to mention all that time you would have spent on hold trying to do this yourself.
21. Taking a Class
Education can improve your life in so many ways. You could take a class in a subject that interests you, or to learn a new hobby, like photography or watercolor painting. If you look for courses at your local community college or adult ed program, you may be able to save significantly on tuition.
22. Hiring a Financial Advisor
If you don’t know what to do with money when it comes to saving, investing, and becoming financially stable, you may want to use your tax refund to hire a financial advisor. To find an advisor, you can ask family and friends for recommendations. You can also check out The Garrett Planning Network, which offers a list of financial advisors in your area that are fee-only (meaning they don’t charge a commission).
23. Signing Up for a Meal Subscription Service
Do you eat out all the time? Then it might make sense to put your tax refund towards a meal service that sends you ingredients and simple recipes each week. While it’s typically not as cheap as going to the grocery store, these services can make cooking at home easy and convenient. Eventually, after you learn some good recipes, you can likely cancel and switch to completely DIY meals instead.
24. Saving for Holiday Gifts
During the holidays, are you always short on cash to buy gifts for your family and friends? Even if get your tax refund early, you might want to put some of it aside in an interest-bearing account until your favorite stores and websites are running sales. For example, you can save big by waiting for Amazon Prime Day, Black Friday, Memorial Day, or Cyber Monday.
25. Investing in Your Health
When it comes to what to do with a tax refund, you might want to use it to improve your health and wellness. You might sign up for a gym, hire a nutritionist, purchase exercise equipment, or get a personal trainer. You could end up saving much more in the long run on your healthcare bills.
26. Investing in Your Children’s Needs
If your children need new clothes or school supplies, or you think they could benefit from summer camp or after-school lessons, then you may want to put your tax refund towards those costs.
27. Investing in Your Pets
Does your dog need a teeth cleaning? Have you been putting off getting your cat an MRI because it’s too expensive? Then you could finally take care of some of their needs with your tax return. You could also purchase pet insurance, which could save you money on your vet bills.
28. Purchasing a Car
Is your car always breaking down? Is it terrible on gas? Do you normally use Ubers all the time? Then purchasing a new or used car with your tax refund could save you big bucks over time. If you currently rely on public transportation, owning a car can also open you up to new job opportunities that may have been inaccessible before.
29. Paying Off Your Car Loan
If you’re wondering what to do with a tax refund, you could always make advance payments on your car loan. You could be paying high interest every month, and paying the loan off early could save you significant money. And, if you pay it off in full, you won’t have to worry about that annoying monthly payment anymore.
30. Investing in a Second Income Stream
You can take your tax refund and start making money with it by investing in a new income stream. For example, you could start drop shipping with Amazon, which involves buying items at a discount from a wholesaler then selling them at a profit. Or, you could fix up your spare bedroom and start renting it out on Airbnb.
31. Investing in REITs
If you want to start investing in real estate but don’t have the funds to buy a property, you can invest in real estate investment trusts (REITs) instead. REITs are companies that own, operate, and finance real estate that produces an income. If you put your money into the right REIT, you may see healthy returns.
32. Investing in Crowdfunded Real Estate
Another way to get into real estate with your tax refund is to invest in crowdfunded real estate. On platforms like CrowdStreet and DiversyFund, you can invest for less and potentially reap the benefits of buying into the real estate market.
33. Funding a Startup
While investing in startups can be risky, the rewards can potentially be high. When you’re looking into what to do with a tax refund, you might want to check out sites like Wefunder and NextSeed, which let you invest in small businesses.
34. Saving for Next Year’s Tax Payment
If you do freelance work or you’re an independent contractor, you may have to make estimated payments every quarter. You could get a head start on your taxes by saving your refund and then using it to make those estimated payments on time.
35. Hiring an Accountant
If you believe you could have gotten a higher tax refund this year, then you may want to put aside your refund so you can use it to hire a good accountant to help you file next year’s tax return. The additional tax savings could far exceed the accountant’s fee.
36. Moving to a Better Rental
In the past, it may have been hard to move to a better rental because you didn’t have the funds necessary — like the first and last month’s rent and security deposit — to make it happen. Now that you have your refund, you might be able to make it a reality. You’ll want to make sure, however, that the rent works with your budget.
37. Getting Dental Insurance
You may have been delaying going to the dentist because it’s too expensive. Or, you may need dental work done, but can’t afford it. If so, you may want to put your tax refund towards purchasing dental insurance for the year. Then, you can take care of your teeth and stay healthy.
38. Buying New Clothes
The right clothes can make a big difference in your day. You not only have to wear the right clothes in a professional setting but being comfortable in what you’re wearing can give you more confidence as well. It can be a good idea to look for deals, however, so you don’t spend your entire tax refund on a fancy pair of shoes or designer coat.
39. Purchasing Stocks
While investing in the stock market can be risky, if you buy shares in a company with a solid track record, you may end up making money on dividends as the company grows. You can always talk with your financial advisor about how to carefully invest in stocks.
40. Investing in Bonds
If you want to invest your tax refund, but don’ts have much tolerance for risk, you might consider investing the money in bonds. These are fixed-income investments and typically make regular interest payments to investors. On the maturity date, your principal investment will be returned to you.
41. Pampering Yourself
Whether you filed on time or missed the deadline and filed late, tax time can be stressful. If you have some tension to work out, you may want to use some of your refund to reward yourself for getting it all done. You could get a massage to help release tension in your shoulders, or splurge on a day at the spa.
The Takeaway
While your tax return may feel like “free money,” it’s really your money given back to you by the government. Uncle Sam was merely holding on to it for a while. It’s yours, so it can be a good idea to be smart with it.
If you are interested in investing the money, you may want to investigate the benefits of the SoFi Invest® brokerage platform. This account lets you invest your tax refund in multiple ways, without having to pay commission. You don’t need a lot of money to get started either. You can begin building a portfolio with as little as $5.
This article was originally published on SoFi.
