7 Smart Ways to Spend Your Tax Refund
Mar 8, 2024
4 min read
In 2022, the IRS issued more than 237.8 million refunds to individuals, with an average refund of $2,753. If you’re expecting a tax refund, whether it’s higher or lower than the average, having a plan for that money can help ensure that you put it to good use.
So, what do you do with a tax refund? Do you spend it? That new TV or spontaneous vacation can be tempting, and if you’re in a solid place financially, you might be able to splurge with your refund dollars. But if you’re like many people, there are better ways to spend your tax return — ways that can put you one step closer to financial security.
The best way to spend your tax refund is to use it wisely. No matter how you plan to use it, your financial goals should be at the forefront of your decision. Here, we offer seven financially savvy strategies for how to spend your tax refund.
How to Spend Your Tax Refund Wisely
Put a Dent in Your Debt
If you’re looking for smart ways to use your tax refund, you can’t beat the payoff you get from reducing or eliminating any high-interest credit card balances you may have. Interest rates can be above 30%, and the average rate has climbed to almost 25%. Getting out from under that debt can give you some breathing room in your budget.
If you don’t have enough money to cover all your outstanding balances, try the snowball method. List all of your cards in order of the interest rates. Pay off the one with the highest interest rate first. Once that card reaches a zero balance, move on to the card with the next highest rate. As you wipe out the debt on a card, add the monthly amount you were paying on that card to the next card on your list.
By “snowballing” your payments, you’re reducing the amount you have to pay in interest, which can add up to hefty savings. Taking steps to eliminate credit card debt is worth more than a one-time purchase.
Pay Down Your Mortgage
Use your tax refund money to make an extra principal payment on your mortgage. Adding just one extra payment a year can knock years off your payment plan. Want to see how? Online calculators can help you estimate how many months or years you could shave off your mortgage.
The numbers can vary based on your home value, interest rate and mortgage length, but if you start making one extra payment per year at the beginning of a 30-year mortgage, you could pay off your home four to five years sooner. Knowing how much you could save can really help put a windfall like your tax refund into perspective.
Fund Your Child’s Education
Another smart way to spend your tax refund is to start or increase your child’s college savings fund. By investing in your child’s education when your child is young, you could have a substantial balance to help with the ever-rising costs of higher education. And if your child is closer to college age, putting every dollar you can toward their education can have a big impact.
A Farm Bureau advisor can help you identify college funding options that can help you maximize your college savings and help your child avoid costly student loans.
Donate to Your Favorite Charity
Pay it forward by donating your tax refund to your favorite charity. Not only can you support a cause you believe in, but you could also qualify for an extra income tax deduction for the following year.
If you’re aiming to reduce your upcoming tax bill with your donation, be sure to donate to a charity the IRS considers a qualified organization. Save any letters or receipts you might need to document the contribution.
Invest in Your Retirement
While saving extra money that comes your way is smart, sticking it in an envelope inside your sock drawer isn’t the best way to do it. That money isn’t compounding interest and making you more money.
Investing in your retirement account will put that money to work for your future. Talk with a financial advisor to find out what options you have for saving your money in a fund or account that will accrue interest and/or dividends. Many retirement savings fund options exist, including 401(k) accounts, IRAs, mutual funds, annuities and more.
Treat Yourself
It’s okay to spend a little extra on yourself and your family every now and then, but don’t spend your tax refund on impulse buys. A good way to figure out how to spend your tax refund is to write down everything you want to save for and prioritize them by importance. This can range from short-term (like a new computer) to long-term (like a dream vacation). Then use your tax refund to budget for those purchases.
Diversify It
Still not sure how to spend your tax refund? Use it to work on several financial goals. By looking at the big picture and the greater good of your financial future, you may uncover options for stretching those extra dollars. Consider splitting your tax refund among:
- A large purchase or upcoming expense, like an appliance or a wedding.
- Home renovations, which could improve the value of your home.
- A life insurance policy to help give you and your family peace of mind.
- Your emergency fund.
What About Next Year’s Tax Refund?
When you see that big deposit from your tax refund hit your bank account, you might start thinking about how to maximize your tax refund for next year. That might not be the best strategy. Ideally, you want to get that money in your paychecks throughout the year, so you can put it to work toward your goals.
But, if you think you’ll spend that money without following your plan if you get it in your paycheck, getting a big refund might work better for you. Talk to an accountant or human resources representative if you would like to adjust your withholding to change the amount of your tax refund for next year.
Need Help Creating a Plan?
If you would like some ideas on how to create a plan to help you meet your financial goals, contact your Farm Bureau agent or advisor today for more information.