So you received a hefty tax refund this year, and now you’re wondering how you’re going to spend it! It may seem both exciting and fun to spend your chunk of money willy-nilly. But we suggest you think twice before spending or saving it.
According to the IRS, the average tax refund in 2019 was down by 2% compared to the levels of the preceding year, amounting to $2,725. Overall, the total tax refund payments made by the federal government is $260.9 billion.
You should make the earned and deserved 2020 tax refund work for you. So, how to spend a tax refund wisely and lucratively? Here are some tax refund ideas for you.
Smart Ways to Spend Your Tax Refund
1. Create or Increase Your Emergency Fund
The general recommendation is to have six to eight months worth of living expenses saved in an easily accessible interest-bearing account. An emergency fund will help to cover the unexpected expenses. Just keep the money separate from your regular bank.
However, if emergencies occur when you don’t have any money put aside for a rainy day, a fast loan with a good interest rate is a suitable available solution.
2. Save for Retirement
To retire comfortably, you contribute to a 401(k). You will need enough money saved for years to come to generate 80% of your pre-retirement income. It ould help you to reach many of your financial goals. That being said, it is never too early to start saving for retirement. There is no better time to tuck money away than into your traditional or Roth Individual Retirement Account (IRA) than when you get your taxes.
3. Invest in Real Estate
Have you ever thought about investing in real estate? Perhaps you can finally find your dream home, a rental property or just an upgrade to a better-suited space for your family.
4. Create a Will
There is nothing enjoyable about planning for your death, but it is important to do so. Leaving children/loved ones behind with no legal guardian or financial security is any parent’s nightmare. If you have loved ones and don’t have a will, it should be your next financial priority.
5. Make Your Home More Energy Efficient
Projects that improve your home’s efficiency in the long term are well-worth the financial investment. Solar panels, new roofs, and better insulation are just the beginning in ways to improve the value of your home and start saving thousands each year on energy bills. A bonus is that these improvements can also extend the lifespan of your home.
6. Pay Off Debt
Use your tax refund to paying off your high-interest debt, starting with the highest one is on top of the list of the best ways to spend your tax refund. You’re reducing interest and improving your credit rating by paying off credit card debt. It is a far smarter route to go than even investing in the stock market.
7. Refinance Your Mortgage
Refinancing your mortgage can result in significant monthly savings. You usually need to have a bigger sum of money to get a lower rate you are hoping for. Your tax refund could provide the necessary resources for that.
8. Start a College Fund for Your Kids
Investing in your children’s education can be a truly fulfilling experience. Save your tax refund in a 529 college savings plan or an Education Savings Account. You will be able to assist your children with their future education plans.
9. Spend it on Necessities
Have you been postponing important dental work? Do you need a new computer? Maybe you need some new clothing? Now would be a great time to put this extra money to use, as these expenses won’t be draining your regular budget.
10. Get Some Life Insurance
If you have children or own a home, then you should have a life insurance that will cover 8-10 times your annual income. Life insurance is very situation-specific though. Make sure to take the time to thoroughly educate yourself on how much life insurance is right for you.
11. Make An Extra Student Loan Payment
Just like credit cards, one of the best strategies for paying off student loans faster is extra student loan payments. It may be a good idea to use all or a portion of your tax refund to make a lump-sum student loan repayment. Contact your student loan lender in writing and explain to them that you have to make a one-time payment toward your student loan principal (not to next month’s regular monthly payment). The more you can chip away at your student loan principal, the more you will save in long-term interest.
12. Seed a Growing Business or Start-Up Company
Ever dreamed of starting your restaurant, company, online business or store? Follow your passion and invest tax return wisely by seeding a startup or growing business. It can also be a great return on investment, as well as one of the smart ways to expend your annual return. Consider making an investment in promising stocks too.TIP If you are asking yourself “where’s my refund?” you can track your IRS refund status here.
Fun Ways to Spend Your Tax Refund
In case you’re still not sure about what to do with your tax return, here are more tax refund ideas.
13. Book an Experience for Yourself
If you have an adventurous spirit, this might be the answer to “what to do with my tax refund” question. Whether it is flying in a hot air balloon, riding a horse, bungee jumping, a new travel destination, or wine degustation, an experience will open new horizons for you. Although the marginal utility of such spending seems low, it will boost your enthusiasm level for sure, just like the same day loan in an emergency situation, when you felt desperate.
14. Donate to Your Favourite Charitable Cause
Contributing to charity provides a huge social benefit aside from the general good feeling of giving back. That is why this may be the best way to spend the tax refund for you. It is an excellent use of extra funds. Although the returns on your investment may not be as immediate as a quick payday loan or as investing in the financial markets, giving to charity will benefit your community in a significant way, and you can also claim the tax deduction.
15. Get a Gym Membership
Most gyms offer fantastic deals for new members who are ready to pay up front for at least one year. Both your wallet and your waistline will appreciate the favor of a gym membership. Just make sure to find a gym that fits your workout style and has a reasonable refund/cancellation policy.
16. Adopt a Pet
If you like animals, there is no better time to adopt a pet than with your tax refund. Pet ownership has multiple benefits:
- Improving your mood.
- Stress reduction.
- Blood pressure control.
- Social support.
- Encouraging exercise.
- Staving off loneliness.
- Providing unconditional love.
17. Grow Your Own Garden
If you have a green thumb, try to build a garden. Growing your food is a great stress reducer! You will also have substantial savings at the grocery store by harvesting your vegetables.
18. Invest in Yourself
This may be the best thing to do with a tax refund if you want to improve yourself. Take a course on a subject that interests or a class at a local college, university, educational school, or enroll in a certification course that you’ve always wanted. You could learn about cooking, pottery, or even real estate investment. By investing in yourself, you can increase the market value of your worth and just learn new interesting things.
19. Super-Size Your Shopping Money
What to do with a tax refund? You deserve some treats and indulgences for your hard work the previous year. Thus, do not hesitate to fund your big-ticket items for your shopping list in 2020. Some of these self-rewards and pampering include your Botox, braces, new car, and other serotonin-boosting activities.
Your “just this once” purchases are solely from your tax refund and not your everyday spending cash. Make sure you do not mingle those two because there is always a thin line between them. You just might risk dipping into your “off-limits-until-needed” cash and mess up your financial plans. It’s either you super-size your spending cash or just tuck your money away and boost your high-yield savings account.
20. And Here is a Bonus: Buy a Lottery Ticket or Make a Bet
Well, that is not smart, but everyone needs to do something silly sometimes. Only you can decide what to do with your tax return. Just keep it under control. Be responsible for your own money, otherwise, you may even fall into a debt trap or become a victim of gambling debt. Do that only once, even if you win the jackpot. And, please, don’t tell anyone we suggested that.NOTE Internal Revenue Service extends the deadline for federal tax filing to July 15, 2020.
Tax refunds are like “found money,” whether they are merely a drop in the bucket or a significant financial windfall. There are smart and fun options when it comes to the best thing to do with the tax refund, which can be both challenging and rewarding simultaneously.
The answer to the question “what should I do with my tax refund” is to create an excellent financial or budget plan. It should help you improve your financial situation but not to the extent of depriving yourself of some well-deserved rewards and indulgences. Are you still wondering how to spend your tax refund? Do some seamless planning to balance between smart and fun spending today.