Once again, we’re in the midst of tax season. For many filers, there are expected delays, since the IRS isn’t ready to process some of the forms.
But as the debate continues to rage on between those that say a tax refund works as forced savings and those that insist you should try to avoid giving the government an interest-free loan, I find myself in the position of actually having a tax refund to think about.
Smart Ways to Spend Your Tax Refund
When you see how much you’re going to be getting back from your taxes, your mind probably starts racing with the millions of different ways you can use the money. Before you spend all your money on a cruise or a new phone, let’s look at some of the alternatives.
Put it in an IRA/Roth IRA. One of the best things you can do with your tax refund, whenever you finally get it, is to invest it. Putting extra money in your retirement accounts can give them the boost they need. If you are not maxing out your Roth IRA or traditional IRA account with your normal income, your tax refund could give you the money you need to reach the contribution limit.
Use a robo-investor. If you want to invest your tax refund, but you don’t know where to start, or you have zero knowledge of the investing world, don’t worry. You don’t have to be a financial wizard to invest your refund money, there are plenty of websites which will handle all of the investing for you.
Sites like Betterment actually will invest all of your money without you having to do a thing. All you have to do is create an account, set your investing goals, and then start making contributions, then Betterment will handle the rest.
Invest in others using peer-to-peer lending. Peer-to-peer lending has become one of the most popular options for investing. The idea of peer-to-peer lending is not new. As long as people have needed money, there have been people willing to lend them money, with interest, of course.
Thanks to the Internet, peer-to-peer lending has never been easier. There are plenty of sites you can use, like Lending Club. Lending Club allows you to browse all of the available loan requests and then select the one which suits your needs the best.
Put your money in a REIT. If you’ve been looking for a way to start investing in real estate, without having the day-to-day duties of a landlord, REITs are an excellent way to do it. REIT are investment trusts which put their money towards large-scale real estate investment opportunities.
A quick and easy way to do this is to create an account on a site like Fundrise. You can get started with Fundrise and real estate investing with as little as $500.
Buy Bonds. If you’ve already maxed out your IRA accounts, there are several other investment vehicles you can use to boost your investment portfolio. Bonds are a great way to invest your money without taking on any additional risk. Bonds offer a small interest rate, but you don’t have to worry about losing your money.
Pay off Your Debt
Another excellent way to use your tax money is to pay off some of the lingering debt which has been hanging over your head. Sure, it’s not the most exciting way to use your refund money, but it’s one of the wisest.
If you have a lot of debt, take your money and pay off some of those debts. You won’t get a shiny new gadget, but you will save yourself thousands of dollars not having to pay your credit card bill any longer.
One common way people pay off debt with their refund is to put some extra money towards their mortgage. Your mortgage loan is probably the biggest debt you have, why not toss some extra money at those mortgage payments.
You never know what curveballs are going to be thrown at you. You can’t use a crystal ball to predict the future, which means you should always have money set aside to pay for any unknown expenses which could pop up. When you get your tax returns, put the money in a bank account. Having an emergency fund will help you prepare for the unknown.
An emergency fund is exactly what it sounds like. It’s the money you have in your savings account for an emergency, like car repairs, hospital bills, or home repairs.
Another way to save your money is to start saving for a big purchase. If you’re trying to buy a new car or saving for college for a child, put this extra money towards the goal.
You can put the money in an education savings account. These 529 plans allow your money to grow tax-free as long as it’s used for any education costs.
Make some Fixes/Repairs
If you’re like most homeowner’s, you probably have a lot of things on your to-do list, and they have probably been on the list for a while. When you the refund money hits your bank account, instead of spending the money on a vacation, pay someone to knock out some of those home repairs you’ve been putting off.
Maybe you’ve been wanting to make some improvements or do a renovation. Depending on the size of your refunds, you can finally redo your bathroom or repaint those walls. It’s an excellent want to use your money and increase your home’s value.
One good example of this is getting your house weatherized. This could be getting new windows, extra insulation, or fixing a drafty fireplace.
Making these improvements can save you hundreds of dollars on your energy bills.
Invest in Yourself
For some people, they want to make big changes in their lives. This could be going back to school, starting their own business, or switching careers. Your tax refund can give you the funds and motivation you need to make those changes. Instead of wasting your money something you don’t need, invest the refund check in yourself. Go back to school, switch jobs, and start your own business. There is no better time than now.
Buy Insurance Protection
Getting your tax refund is a great time to look at your insurance plans and fill in any holes you have in your insurance protection.
While you probably have auto insurance (hopefully) and you might be required to have a homeowner’s insurance plan, but there could be some other severe gaps you have in your insurance coverage. This could mean buying a life insurance policy, an umbrella policy, or increasing your homeowner’s insurance through flood insurance.
Why not give some of the extra money back to the community. There are thousands and thousands of excellent nonprofits out there who can use your tax refund for great causes. Consider setting some of your refund money aside to give to your favorite charity.
There are only some of the wise ways you can spend your tax refund money. One important note is don’t rely on your tax refunds for bills or monthly expenses. There are a large number of people out there who know their tax return is coming, and they budget for the refund.
Because you never know exactly when it’s going to be there, you should never rely on this extra money.
What Will You Do With Your Tax Refund?
For the first time in years, my husband and I don’t owe anything for federal taxes (we do owe state taxes, though, since I don’t pay those quarterly). The combination of me reducing my client load, along with some unexpected deductions, helped reduce our income — and our taxes. But what I really think did it was the fact that my husband didn’t claim any exemptions on the W-4 Forms he filled out when he began teaching as an adjunct.
So, what are we going to do with these new found riches? Well, for all us self-employed folks, the government offers the option to apply your tax refund to your quarterly taxes. Our refund is almost exactly the same amount that we will need for our first quarterly tax payment. So, come April, that’s one less thing I’ll have to worry about.
But, for fun, I thought about what else I could do with the tax refund money:
- Boost retirement account contributions
- Invest in my income portfolio (dividend stocks or P2P lending)
- Pay off the Prius loan
And, really, it is kind of like we’ll have “extra” money, since I had already planned to make that quarterly tax payment, on top of the expectation that we would owe at least a little bit. I’ve been pleasantly surprised (and that doesn’t happen a lot when taxes are involved). But we’re going through a refinance right now, so maybe I’ll just hold on to the money when it comes, and see where we’re at before committing to something.
Why Not Spend it on Something Fun?
It’s fairly common for consumers to spend their tax refunds on something fun. A tax refund is seen as windfall money — usually destined for something fun, like a vacation or new gadgets for everyone in the family.
In a lot of ways, I can see that as being attractive. I remember a conversation I had with Sandy from Yes, I Am Cheap at FinCon11, late at night. She mentioned that many of those who receive tax refunds spend all year using their money for the necessities of life. If “extra” money comes to them, the mindset is that this a chance to do something fun — something that you might not ever get the chance to do again.
When are you going to get to go to Disneyland as a family? This is your chance.
You Get to Decide
How you use your tax refund is up to you. The best recommendation we have is to use your money with a plan in mind. Have fun, take a vacation, pay some bills, invest. All are great options. But spending the money little-by-little on things you won’t enjoy or remember may not be the best way to spend your tax refund.
So have a plan, and use it wisely!
What do you think? Are you getting a tax refund? If so, what will you do with it?
For more answers regarding taxes, check out our Tax Guide.