What to Do With Your Tax Refund
While tax season may be a dreadful time for some, the possibility of getting a tax refund can feel like sweet relief for others. But then comes the question — what should I do with my tax refund? Since it’s not in your normal budget, figuring out how best to use the extra money can be anxiety-inducing for anybody. Everyone’s situation is different, so let’s explore some of the most common ways that you may consider using the money from your tax refund.
Common ways to spend the extra money from your refund
If it helps, you can think of your tax refund as you would think of your paycheck. Once you know how much you’ll be getting, you can make a plan for how to allocate the money. You may even want to divide up the money to be spent in different ways, depending on how much money you receive. Here are some things you may want to take into consideration.
If you ask someone what they’re planning to do with their tax refund, you might often hear “I’m going to put it into savings.” But what does that mean? There’s no doubt that saving money can be beneficial no matter what you’re saving for. For some, it may be helpful to identify exactly how much of the refund is going to be saved toward a certain goal. If you use any budgeting app or system, you may already be familiar with setting savings goals. Even if you don’t use those systems yet, it’s pretty easy to set savings goals. All you need to do is think about some of your financial goals and how much money you need to accomplish them. You may also want to have a savings account that is just for funding your unexpected expenses.
Many of us have financial goals, even if we don’t realize them yet. There are several major life events that can take quite a toll on your bank account, including weddings, buying a house, and having children. By identifying your goals and a targeted amount that you want or need to be saved up, you’ll be better able to meet your goals by the timeline that you’ve set out for yourself.
An emergency fund can be an important thing for many adults to have just in case unexpected expenses come up. Think about what would happen if you were faced with a job loss. Do you have other income streams to rely on? Would you have enough to cover your bills and essential living expenses such as rent and groceries? There are many different guidelines out there, but generally speaking, it’s a good idea to have enough money saved up to cover a month or two of your expenses if possible.
Paying off debts
If getting out of debt is one of your financial goals, the money from your tax refund can help you get there faster.
Do you know what your credit card balances are? Paying off your credit card debt with your tax refund can help you avoid accruing interest and paying more in the future. If you have balances on a few different credit cards, it can be helpful to prioritize the credit card with the highest interest rate so you can pay as little as possible in the long run.
Whether it’s a federal or private student loan, it can’t hurt to put some or all of your tax refund toward paying it down. If you have several smaller loans, you may want to see if you’ll have enough from your tax refund to pay off one or more of the loans entirely. You can also prioritize loans with the highest interest rate. Even if your student loan is currently deferred and you aren’t required to make payments on it, those payments will come around eventually. Paying off a chunk of your student loan now can help you pay less in interest later.
If you own a home, you’re likely making monthly payments on your mortgage. It may be worth looking into whether making an additional payment can help lower the amount that you’ll pay in interest over the lifetime of your mortgage.
To turn your tax return into even more money, you may also consider investing some or all of it.
Do you have a retirement account set up? Some people have a retirement account through their employer, while others have an individual retirement account such as a Roth IRA. You can use your tax refund to contribute to your retirement account to help set you up for the future.
Whether you’re new to the stock market or a seasoned pro, you can use the extra money from your tax refund to invest in the stock market. If you choose this option, be sure to do your research before choosing a brokerage or app to invest your money with
Of course, you can also use your tax return to have a little fun! Even if you have financial goals to meet and debts to pay off, it’s okay to splurge on something that will enrich your life.
Companies that can help you manage your tax refund
If your tax refund is inspiring you to find ways to manage your money, then you’re in luck. There are dozens of budgeting and money management companies that can help you address those needs.
First off, you’re going to need to have a safe place to store your money. If you have a direct deposit set up, then your tax refund will automatically be deposited into the bank account of your choice. If you need to set up a new bank account, there are plenty of options to choose from. You may live near local credit unions that can offer personalized in-person service and competitive interest rates on loan products. There are also online banks to choose from, such as Ally and Capital One. When choosing your bank, be sure to consider what’s important to you. Some features to look for can include mobile deposits, no minimum balance on your checking account, and no ATM fees.
Money managing apps
You can use a money managing company to not only manage your tax refund but all of your personal finance needs year-round. Again, it’s important to consider what you want and need out of a money management account. For something free and simple, you may find that an app such as Mint checks all of your boxes. Couples may want to choose an app like Zeta that is specifically geared toward helping couples manage their finances together. Or, if you want to see what all of the hype is about, maybe now is the right time to try out You Need a Budget.
Do you have to pay to file your taxes?
Whether you pay and the amount that you’ll pay to file your taxes will depend on how you choose to file them. If your taxes are relatively uncomplicated, you may be able to e-file your taxes using a service like H&R Block or TurboTax for both your state and federal tax return. You may also be able to use one of the IRS options, such as Free File or Fillable Forms.
However, if your taxes are more complex, you may want to consider using a paid tax service. Services such as Jackson Hewitt allow you to hand over your tax paperwork and let an expert handle it for you.
Pros and cons of tax returns
If you have a hard time saving, using your refund check or direct deposit to fund a savings or investment account can help without affecting your monthly budget.
The extra money can feel like a windfall, so if you’re someone who struggles to treat yourself, you can use it to get yourself something that you’ve been wanting or needing for a while.
You’re giving Uncle Sam money throughout the year instead of getting a larger paycheck. Basically, if you’re getting a refund each year, it means that you’re paying more income tax than you need to be. The U.S. Department of Treasury reported that the average refund in 2019 was higher than in 2018. While this may sound like people were getting more “free money,” it just means that the government was holding onto more money in 2019 than it did in 2018.
You have to wait for the IRS to give you back money that is already yours. You have to wait until the first quarter of the year to file your taxes from the previous year, and even after you file, it can take some time before you see your refund.
The bottom line
If you’re getting a tax refund, it’s a good idea to have a plan for how to use it. Everyone’s goals and situation are different, so you have to consider what’s important to you to best allocate your refund money. Paying off debts and saving for financial goals can be great, but after a hard year, it can be equally great to splurge on something nice for yourself.
No matter what you decide to do with the tax refund money, receiving your tax refund can be a great time to consider your money management goals for the next year. If you want to add more to your monthly budget, you might consider changing your tax withholding certificate to reduce the amount taken from your paychecks. It can also be a good time to sign up for a money management or budgeting app to make it easier to track your personal finance goals year-round.