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 six clever strategies to help you maximize 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 can save you money on interest charges down the road.
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.
Read more: Debt Relief: How it Works and 4 Common Questions
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 can be accessed 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.
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: If you’ve been thinking about a career change, use your tax refund to facilitate the switch. You can enroll in a certification course or technical training, 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. 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 may be tax deductible (for next year’s tax season).
6. Treat yourself
Consider using your tax refund to give yourself a break. Take a no-tech weekend, plan a getaway with loved ones, or book a spa staycation. Whatever it takes to rest, recharge and reset, do more of that.
Making your tax refund count
These suggestions may not seem as thrilling as using your refund for a fancy vacation. Still, they’re more challenging than simply depositing money into your checking account to cover everyday expenses.
However, investing wisely could provide you with peace of mind and financial stability, leading to benefits for years to come.
Prosper does not provide tax advice. You should consult your own financial advisor.
Written by Rose Wheeler
Rose Wheeler oversees the blog’s writing team and creates content strategy for Prosper. With 15+ years of journalism experience, she has covered business and finance-related topics such as consumer finance, financial products, banking, credit, and money management. Previously, Rose served as Editor-in-Chief for Wealth Hub at Future, Deputy Editor at Forbes Advisor, and Content Editor/Strategist at Millennial Money and The Motley Fool. In her free time, she enjoys exploring new places, reading, and playing video games.