You know saving your tax refund is a better idea than blowing it on a fancy Peloton bike or some red-bottom Louboutins. But dropping your refund into a standard savings account is hardly the only smart option.
With the average taxpayer raking in a refund of roughly $3,000 each of the past several years, here is some standard eat-your-vegetables advice and some juicier “how should I spend my tax refund?” ideas.
1. Buy your financial freedom
There’s no bigger drag on your bottom line than lugging around high-interest debt — typically credit card debt — with interest compounding against you month after month.
If you have credit card debt, paying it off is the best investment you can make with your tax refund. Doing so delivers a guaranteed return on your money equal to the interest rate you were paying your lender.
If your refund doesn’t cover the entire outstanding balance, look into rolling over your remaining debt to a balance transfer credit card with a lower interest rate. If your credit isn’t good enough for that, look for a lower-interest debt consolidation loan.
If you have outstanding high-interest debts, stop reading now and start crafting your debt payoff plan. If your tax situation is likely to be the same next year, look into adjusting your current withholding so that you have access to the money to pay down debt right now instead of giving Uncle Sam an interest-free loan all year.
2. Get peace of mind
There’s no better sleep aid than knowing you’ve got the cash on hand to cover unexpected expenses (four flat tires, flooded basement) and income-hampering events (a cut in work hours, disability or sudden job loss). Ideally, you should aim to have enough in your emergency fund to cover three months of must-pay living expenses. That said, having even $500 saved can help you weather a lot of emergencies, so aim for that first if you’re starting from zero. Earmarking a portion of your tax refund to the cause will give you a head start on building up your financial fortress.
3. Super-size your shopping money
Funding the big-ticket items on your 2020 shopping list (new car, tuition, braces, Botox) just got an extra boost thanks to the tax refund you didn’t fritter away on aimless Amazon purchases.
It’s best not to mingle off-limits-until-needed money with your everyday spending cash, because it requires constant discipline to keep from dipping into it for all those “just this once” purchases. Instead, bypass anemic checking account interest rates by tucking the money away in a high-yield savings account. Right now many are paying 2% interest with low minimum-balance requirements.
4. Take $50 and play the lottery (one in particular)
For further incentive to save instead of spend your tax refund, enter the Save Your Refund lottery for a chance to win up to $10,000.
The promotion, from America Saves and Commonwealth, is designed to encourage people to divert a portion of their tax refund — a minimum of $50 — into a savings account, individual retirement account, bond, CD or Treasury Direct account. Each $50 you sock away buys an entry into the lottery for a chance to win 100 weekly $100 prizes. Submit a photo that represents your savings goal and you’ll be entered for one of two grand prizes of $10,000 each.
5. Seed your million-dollar portfolio
Want to know how to become a millionaire? Answer that “what should I do with my tax refund” question by investing it. Letting that money, and the money from future tax refunds, grow and you’ll put yourself on the path to obscene riches — if that’s your cup of tea.
For example, a taxpayer who received a $3,000 refund in 2010, invested it and earned a 6% average annualized return would have more than $5,000 in that investment account today.
Earning $2,000 on a tax refund isn’t too shabby, but it gets even better for those who committed to investing their refunds each of those 10 years and letting compound interest and earnings do their thing: They’re sitting pretty with more than $47,000 from savings and interest. Flash forward 20 years and the disciplined savers who continue to invest their $3,000 tax refund every year for two decades — for a total of $60,000 invested — earning a 6% average annual return is looking at $116,000. That’s nearly double the total amount invested.
Make 2020 the year that you get on the path to becoming a millionaire. You have until April 15 to open and fund a traditional IRA or a Roth IRA; see NerdWallet’s roundup of best places to open an IRA, or check out our favorite picks below. File your taxes soon so you can start amassing your fortune.
6. Invest your tax refund in your ‘human capital’
Another tax refund maximizing strategy is to increase the value of your human capital. That is, invest in yourself.
Think about it: You are your biggest income-producing asset. Your expertise, talent, experience, work ethic and reputation for bringing delicious snacks to office potlucks are all part of what adds value to this asset. And unlike stock market returns and interest rates, you can influence your own rate of return by improving your value in the working world.
Using your tax refund to pay for additional training, tuition, a work-related conference or membership in a professional organization is an investment that can pay off for years to come in bigger paychecks and greater job stability.
7. Repave your yellow brick road
There’s no place like home, and given the price people pay for their split-level ranches, Cape Cods and condos, keeping the place in tiptop shape is a wise use of tax refund dollars.
If you’re planning to put up a “For Sale” sign this year or refinance your home, concentrate on projects where you’ll recoup the highest amount of your investment at resale. Upgrades related to energy efficiency, curb appeal and midrange remodels in kitchens and bathrooms can often yield good returns on your investment, but for the deep dive you might wish to review Remodeling magazine’s annual Cost vs. Value Report to see which projects might be best for your home’s value. Here are four other ways to increase your home’s refinance appraisal value.
Not all home improvements are about the bottom line. If a bathroom or kitchen remodel or a new deck would increase your enjoyment of your abode, that’s reason enough to use your tax refund to spiff up the joint.
8. Splurge on a serotonin booster
Sure, spending your tax refund on some new doodad will put a kick in your step — but only briefly. When the buyer’s high fades, you’ll be counting the months until you can blow next year’s tax refund on doodad version 2.0.
A smarter and more satisfying splurge is spending money on an experience such as travel, music lessons or a class on, say, Appalachian looming techniques. Studies show that experiential purchases make us happier — and for a longer period of time — than buying material things. In particular, splurging on experiences that you can enjoy with others, like tickets to a concert or sporting event, will continue to pay out happiness dividends years down the road when you and your buddies fondly reminisce about “that time when….”
9. Buy some good karma
Donating money to a cause you care about is the ultimate tax refund twofer; it not only benefits those in need, but the giver also derives lasting warm fuzzies from making a difference in other people’s lives. Combine charitable giving with volunteer work with friends and family — for an experiential touch — and you have the ultimate do-good/feel-good tax refund strategy, plus a potential donation deduction for next year’s taxes.
Uncle Sam will soon start licking stamps and dropping IRS tax refunds in the mail — or hitting the “send” key for those who file electronically. (Here’s how to track your tax refund.) Come up with a smart tax refund strategy before the check arrives, and your future self will thank you.