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8 Financially Responsible Ways to Use Your Tax Refund

Close up American dollars in fifty banknotes.

It’s tax refund season, so you might have some extra cash burning a hole in your pocket, or you might be eagerly waiting for your refund to hit your account. Having some additional money on hand is always cause for excitement, but it’s important to carefully consider how you’re going to spend it.

Before you blow your refund on an expensive weekend or extravagant purchase, take a step back and try to determine the best approach you can take with this money. Sure, you might have your eye on a new pair of shoes or maybe you’re thinking of finally upgrading your TV, but keep the long term in mind. Let’s face it: there are not a lot of times where you’re handed a chunk of unexpected money. While it might be fun or feel satisfying in the moment to make an extravagant purchase, it won’t do you much good in the long run. Instead, think about ways to invest your tax refund – both financially and investing in yourself – for the future. To help you get started, we’ve compiled this list of eight financially responsible ways to use your tax refund this year.

1. Build or boost your emergency fund

Having a strong emergency fund is a crucial part of your financial health and stability. What is an emergency fund? It’s money that you have specifically set aside for unexpected expenses and emergencies. Without one, you are potentially one mishap away from being in financial jeopardy. Think about it like this: if you were to lose your job or have a sudden medical issue, how would you pay for it? The answer for many is to dip into savings or go into debt via credit cards or loans. Then, not only is there a struggle to get back everything you’ve spent, but you’re even less prepared for another emergency. If you don’t have a fund with three to six months’ worth of living expenses set aside to cover unexpected events, work on setting one up now. Use some of your tax refund to start building your emergency fund or boost an existing one. Don’t worry about getting the entire thing saved up at once – be consistent and persistent, and you’ll eventually get there!

2. Pay down debt

Not all debt is bad, but if you’re in significant debt or have high-interest debt, then paying it off is one of the most important things you can do for your financial health. High-interest debt can kill the best of budgets, and it can be tough to get out of due to the relatively large percentage of your payments going to interest. If you’re carrying outstanding debt with high interest, consider using some of your tax refund to pay it down. You can actually save money in the long run on interest payments by paying off high-interest debt, and the peace of mind you’ll get is even more valuable.

3. Invest in your education

One way to use your refund as an investment is to invest in yourself and your education. If you’ve been looking for a way to advance your career and increase your earning potential, this may be your chance. The same way that a financial investment can pay dividends in the future, investing in your education can reward you with a higher salary in the future. Consider furthering your professional education by allocating some of your tax refund to career workshops, conferences, or additional certifications. There are plenty of online courses so you can advance your career on your own time from the comfort of your own home if a more traditional class doesn’t fit your schedule. If you’re not sure what you’d like to pursue, check out some free courses first before choosing which to invest your refund in.

4. Feed your savings

This one is straightforward, but that doesn’t make it any less of a good idea! It’s always a good time to boost your savings, and tax refund season is no exception. Set aside a portion of your refund for your long-term savings to help you get closer to your financial goals. Consider different types of accounts for your savings as well. You may want full access to all of your funds at all time and keep it in a traditional savings account. If you don’t mind not accessing your money for a while, a Certificate Account can offer great returns. If you want to steer a middle course with a great rate while maintaining full access to your funds, a High Dividend Savings Account might make sense.

5. Prepay your mortgage

We’ve talked about using your tax refund to invest, pay down debt, and start an emergency fund, but getting ahead on payments can be an effective use of your refund too. Making an extra mortgage payment or two can be a great way to free up some money for the long term. Like what we discussed about paying down debt or investing in your education, it may not feel like it in the moment, but you can set yourself up for big future rewards. Reducing the principal can have an exponential effect on your loan since so much of it goes towards interest over the life of the loan.

6. Make home improvements

Regardless of whether you’re settled into your home for the long haul or you’re considering putting it on the market, using your refund on home improvements is another way of investing it. Spending some, or even all, your tax refund on improvements that increases the value of your home is an investment in your equity. Especially if you’re thinking about selling, using these extra funds on the right home improvements or renovations can greatly increase the value of your home without taking money out of your pocket. Even if you’re in the home you plan to spend the rest of your life in, consider using some of these funds to increase your home’s energy efficiency. This investment in your home can pay off for years to come in the form of lower energy bills.

7. Start or contribute to a college fund

We have talked about investing financially, investing in yourself, and even investing in your home, but what about investing in the next generation? If you have children, or plan to start a family in the future, consider allocating a portion of your tax refund to a college savings fund, such as a 529 savings plan. Contributions to a 529 plan may be deductible on your state taxes, and earnings are tax-free when used for qualified education expenses. It may seem like a long way away, but those years will go by in the blink of an eye, and that money will be a welcome help when you’re packing your child off for their freshman year.

8. Invest in your retirement

If eligible, consider allocating a portion of your tax refund to your employer-sponsored 401(k) or an IRA. If you don’t have a retirement account or you don’t contribute to your 401(k) regularly because of day-to-day financial constraints, then this is perfect opportunity to use excess funds to set some money aside for retirement. Even if you’re just beginning your career and retirement seems like more than a lifetime away, getting started now will pay off later. The earlier you start investing for retirement, the more you can potentially accumulate for your golden years.

You might be conflicted about what to do with your tax refund. After all, it’s not often that you get an unexpected check to add to your usual income. The temptation to use this money recklessly and splurge on unnecessary spending is certainly there, but by exercising some discipline now, you can do yourself a big financial favor in the future. Use this list to consider all the financially responsible ways you can use your tax refund, make the choice that works the best for you, then sit back and wait…you’ll thank yourself one day.

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