Like most people, after filing taxes, you’re definitely looking forward to getting your tax refund. Unless you need to use it for immediate expenses like rent or bills, consider a plan to spend your refund wisely.
Here are eight smart ways to make the most of your tax refund.
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1. Pay off or pay down debt
Living with debt is stressful, whether you have high-interest credit cards, student loans, car loans, buy-now-pay-later services, or unpaid medical bills. While your tax refund may not get these balances to zero (or close to it), paying down debt is a wise way to spend it.
Use your tax refund to pay down your debt with the highest interest rate – often known as “the avalanche method.” This approach saves you money on interest charges down the road. With the Federal Reserve raising interest rates to combat inflation, you can expect high-interest rates to get even higher.
Or, if you have multiple credit cards with similar interest rates, you can use your tax refund to pay down your smallest balances first–called the “snowball method.” Then, with fewer card balances to pay, you can leverage your tax refund and potentially raise your credit score.
By spending your tax refund paying down (or paying off your debt), you can start to save money immediately and reduce your financial stress.
2. Build your emergency fund
Another great way to use your tax refund is to build an emergency fund. An emergency fund is an essential financial resource meant to help you (and your family) during job loss, salary change, or unexpected expenses like emergency medical bills or natural disasters.
Ideally, an emergency fund should be able to meet between 3-6 months’ worth of expenses. This includes your rent or mortgage, utilities, groceries, transportation, and other essentials.
Your tax refund can help you start, or grow, your emergency fund. If you recently started saving, look for a high-yield savings account–preferably one that accrues interest at a higher rate and that you can access quickly.
As a bonus, putting your tax refund into an emergency savings account keeps it out of your checking account–and away from any spontaneous spending sprees (no judgment!).
3. Invest in yourself
While investing in yourself isn’t always easy, it can certainly result in direct personal gain. You can use your tax refund to invest in yourself by:
- Continuing your education: One of the best ways to spend your refund is to invest in your professional development. Enroll in a certification course or technical training. If you’ve been thinking about a career change, use your tax refund to facilitate a switch. You can also start a college fund for yourself or apply to graduate school. Whichever you choose, there may even be future tax benefits available through the Lifetime Learning Credit. According to the IRS, “this credit can help pay for the undergraduate and professional degree course, gaining new technical skills or even enrolling in graduate and professional degree courses–including courses to acquire or improve job skills.” This credit is worth up to $2,000 per tax return, and there isn’t a time limit on when you can claim it.
- Starting a side hustle: Use this year’s tax refund to make your dreams a reality. Launch an Etsy store or turn your refund into the capital you need to get your small business off the ground.
4. Build your retirement account
No matter the stage in your career, keeping your retirement in focus is important. Your tax refund can go a long way toward that goal. You can use your refund to contribute to another retirement plan, such as your IRA or Roth IRA, even if you’ve a 401(k) through your employer.
5. Invest in your children
The cost of college and secondary education continues to rise and shows no signs of slowing. Using part of all of this year’s tax refund to start a 529 College Savings Plan for your children (if you have them, of course!) Like retirement plans, savings in a 529 plan grow tax deferred. While you can’t deduct your contributions from your federal taxes, you don’t have to pay taxes on the withdrawal you make for future tuition payments.
6. Buy a life insurance plan
Anyone who has shopped for life insurance can attest to the high price tag. If buying a life insurance policy has been cost-prohibitive in the past, spending your tax refund on life insurance can help to secure your family’s future.
7. Donate your refund to charity
If you want to up your charitable giving this year, consider putting some of your tax refund aside to support a charity or charities of your choice. Not only will donating your refund can help your community, but most charitable donations are also tax deductible (for next year’s tax season).
8. Treat yourself
While Prosper encourages practical financial planning, we believe life is about balance. After all, the stress of the last three years has taken its toll on everyone. For some, treating yourself with your tax refund may be just as important as using it wisely.
Consider using your tax refund to give yourself a break. Take a no-tech weekend, plan a getaway with friends and family, or book a spa staycation. Whatever it takes to rest, recharge and reset, do more of that.
Making your tax refund count
On the surface, these suggestions may not sound as exciting as spending your refund on an exotic vacation. They may be more challenging than just putting them into your checking account to cover routine expenses.
But the peace of mind and financial stability that smart investing brings will reap benefits for years. Prosper offers products and services tailored to our client’s needs, whether you’re working to raise your credit score, apply for a personal loan, or consolidate your debt.
Prosper does not provide tax advice. You should consult your own financial advisor.
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