This post may contain affiliate links; please see our disclaimer for details.
Sometimes it can be hard to know the best place to start spending your tax refund wisely.
Most of the time, the first place we want to spend our money is at the stores. We purchase new clothes, electronics, shoes, and probably more products than we need.
Getting caught up in the hustle and bustle of looking cool is easy. Many try keeping up with the Joneses down the street; however, there are much wiser places to put your money that can help your financial goals.
So let’s explore 9 smart ways to spend your upcoming tax refund money to set you up for a better future!
Table of Contents
1. Pay Off Your Debt
We know this is not the most glamorous or fun way to spend your money but paying off debt has many benefits.
With a little extra money in your pocket, it’s the perfect time to lessen the stress of those bills.
Almost every adult has some student loans, house bills, or credit card debt that needs to be paid. Tax refund money can help to help ease this burden.
- Student Loans: Right now, almost one-third of American students will owe something in student debt, and the average student loan debt in 2020 was over $38,500 per person. These numbers are staggering and only expected to increase. Another crazy statistic about student loans is that about 9% of people who have student loans are falling behind on their payments.
- Mortgage: According to the Federal Reserve Bank of New York, mortgage debt has risen to over $10 trillion by the fourth financial quarter of 2020. This has been increasing dramatically since the peak in 2008. If you are a home-owning adult with a mortgage, it may be a good idea to start decreasing your debt with a jump-start from your tax refund.
- Credit Card Debit: Unfortunately, many struggle to break free of credit card debt worldwide. In the last quarter of 2021, the credit card balance was at a staggering $860 billion. These numbers are far from the number reached during the 2008 financial crisis. With your tax refund, it is time to start chipping away at your credit card debt and building your financial portfolio.
Related content: 11 Tips That Helped Me Graduate Student Loan Debt Free With One Kid
Related content: The Debt Snowball – How We Paid Off $56,000 In Student Loans
2. Emergency Savings Fund
We can never anticipate every twist life throws at us. What if your car doesn’t start one morning, or if the pipes burst in your house while you were on a trip, and your home insurance doesn’t cover flood damage?
These are real problems we can run into, and if you don’t have a little extra money put aside, you may be adding more to your credit card debt or would have to take out a personal loan.
CNCB says that only 39% of Americans can afford an extra $1000 toward an unexpected purchase.
If you haven’t already, it is a good time to put aside some extra money for these unexpected purchases.
As a rule of thumb, some people like to have enough money in an emergency fund to cover anywhere from three to six months of expenses.
Let’s say you got laid off and didn’t have enough to cover the bills. This would be stressful for anyone, but having an emergency fund provides peace of mind.
It is time to ease your worries and start saving for these mishaps by creating an emergency fund.
3. Add to Your Retirement Account
You have likely said, or a coworker has said: “can I retire yet?” Retirement and even early retirement (and maybe having a house on the beach) are what most people are striving to achieve.
Using your tax refund money to add to your 401K, Roth IRA, or Traditional IRA is a smart way to spend that money.
If you haven’t set up a brokerage account to invest in a retirement fund, this is a great time to start, so you aren’t working until you are 80.
By setting up a brokerage account, you are building your way toward financial freedom. If you dedicate all or some of your tax refund every year to your retirement fund, you will be in a great spot by the time you are ready for that phase of your life.
M1 Finance is a great investment opportunity with its robust yet simple app. There are ZERO commissions or account management fees.
Deposits $1,000 or more into your M1 Invest account within two weeks of signing up and get a cash bonus of $30-$500 to that account.
It is not just a trading stock brokerage account but also offers an IRA option that allows you to invest in your retirement.
We highly recommend using M1 Finance to open a brokerage or retirement account! M1 Finance can undoubtedly help you on your financial independence journey.
4. Reinvest in Yourself
Although all of the following are fun, by reinvesting in yourself, I don’t mean buying a luxury car, having a spa day, or going on a shopping spree.
If you want to take a budgeting course or purchase some new self-help books, using your tax refund would be a great way to use that money.
We rarely have money fall in our laps, so when we have some (like after tax season), it can be nice to use it to improve ourselves.
One way to better reinvest is to take a course on something that will earn you more money. There are countless courses on becoming successful at affiliated marketing, writing, investing, real estate, or other ways to make passive income.
Investing in yourself is a smart move when it comes to your tax refund.
5. Home Renovation
Have you been putting off upgrading your kitchen or getting new floors for the bathroom?
Home renovations are a common expense, but with the help of your tax refund, it might be a wise place to use your money.
If there are “absolutes” when it comes to your home for home renovations (i.e., you NEED a new water heater, or your washer is held together with duct tape), that is probably where you should spend your money first; however, there are other options that can save you big down the road.
Here are some home improvements to consider that can save you money in the long run:
- Switching to low-flow toilets and showerheads: This can help to reduce the cost of water.
- Upgraded security system: If you have an outdated security system yet more valuables in your house, it might be a wise choice to update that to protect your valuables when you are away.
- Shifting to LED light bulbs: These light bulbs can help you to save money on your next energy bill
Using your tax refund money to upgrade your house and add value is an excellent way to get the most out of your money!
Before renting our second property, we painted all cabinets white (see picture below). This did not cost much money and helped make the place look a lot nicer / added value. 🙂
6. Take Advantage of Compound Interest
Are you new to the world of investing? It can be overwhelming to try and follow the stock market and know what purchases to make.
However, if this is something you have always been interested in and want to try, using your tax refund money is a good start (that way, if you make a wrong decision, you aren’t using your life savings).
A safe place to start when it comes to the stock market is the S&P 500. The S&P 500 (Standard & Poor’s 500) is an index that tracks the most notable 500 companies in the U.S. These companies have some of the greatest impacts on the economy.
By investing in the S&P 500, you own a small portion of those 500 publicly traded companies. If you are new to investing, this is safer for your money than purchasing individual stocks.
With individual stocks, you risk losing all the money you put into that company going bankrupt.
If you have been dying to dip your toes into investing, why not start this year with some of your tax refunds?
7. Jump Start Your Business
You have a little extra money and a great idea. Why not leap and start your business?
You can use the money to hire a website creator or buy the necessary supplies. You can also file for an LLC with the money.
Investing your money into creating a business can help bring you financial freedom and allow you to have more money in the future. Take this as a sign to jump-start your business with your tax refund money.
8. Travel
Although this may sound like a way of wasting your money, hear us out because we don’t mean drinking endless margaritas on a beach (even as tempting as that sounds).
Taking a vacation to clear your mind, discover your passions, and learn about a new culture is not wasted.
Traveling allows you the opportunity to explore our world and all its uniqueness with it. You could also travel to do volunteer work.
If you have always wanted to volunteer abroad, you could use some of your tax refund to finally do it. There are plenty of affordable programs that do 1–2-week volunteering opportunities.
Traveling can also be good because it gives you experiences that can give you an edge.
Many companies ask about your experiences with diversity or what diversity means to you in an interview.
If you have traveled and have experiences with new cultures, you have a great answer to those types of questions because you have had that experience.
Spending your tax refund money on a new and exciting adventure could be a wise decision that can benefit you for years.
9. Contribute to a 529 Plan
If you have never heard of a 529 plan, don’t worry because you aren’t alone.
A 529 plan (also known as a qualified tuition plan) is a way to save money for possible future educational costs for your children.
To be a little more specific, according to the U.S. Securities and Exchange Commission, the 529 plan is a “tax-advantaged savings plan designed to encourage savings for future educational costs.”
The two types of plans are prepaid tuition and education savings plans.
Prepaid plans allow the saver (you) to buy credits, at the current price, to a university for your child. Prepaid plans are typically only for tuition and fees and do not help cover room and board.
The biggest advantage to a prepaid plan is it allows you to pay at today’s prices versus the future prices of college.
Education savings plans allow the saver to open an investment account to save for all higher education costs, including room and board.
These plans are known to be a bit riskier depending on how you invest your money. They also are not as protected by the state as many prepaid plans.
It is important to do your homework regarding the best option for you and your family when it comes to opening and investing in a 529 plan; however, if you know your kids have dreams of going to college, this may be a smart option for you when it comes to your tax refund this year.
In Conclusion
There are a variety of smart ways you can spend your tax refund money. We want you to make the best decisions for yourself with your money.
Whether saving for retirement or paying off your debt, you will set yourself up for a better financial future!
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
