Apr 3, 2023
Wise Ways to Spend Your Tax Refund
There are only two certainties in life: Death and taxes. Everything else is uncertain
After you’ve made it through tax season -- filing your taxes and the hair-raising paperwork-gathering it entails -- what will you do with the big fat tax return check Uncle Sam sends you? True, it might not be that big or that fat but a tax return of even a few hundred dollars is always a joy to receive. Still though, what will you do with it? If you're uncertain, read on.
There are lots of ways to spend your tax refund wisely...
You work hard for your money and however much of it you get back in your tax refund you should spend wisely. You can pay down debt. Start or grow an emergency fund. Fund your retirement account. Put money in the stock market. Buy the life insurance or health insurance you’ve been putting off. Make the home or car repairs that keep you up at night. Make an extra mortgage or student loan payment.
And others that maybe aren't so smart
What you don’t want to do is spend your tax return money on something unnecessary or on something that really could wait. Like a shopping spree, or more a tattoo. Or the hiking boots you’ve had your eye on.
Purchases like those can come later. (Or you can ask others to buy them for you for your birthday, rather than spending your own hard earned money on them!)
The thing to do with your tax refund is to invest it, start a college fund, use it as seed money to start a small business, pay for classes, continuing education, and other education expenses that will improve your future or the future of someone you love.
The point is to spend your tax refund on something of consequence. Something that will make a real difference in your life and maybe the lives of the people you love (like that college fund we just mentioned!).
Here are 10 smart things to consider doing with your tax refund
1. Pay down debt
There isn’t a person on the planet who likes thinking about how much credit card debt or other debt they might be carrying, so this is probably going to be your least favorite option on this list.
But, as long as you’re carrying credit card debt or student loans, the income you bring in each month is compromised. A chunk of it always has to go toward the credit card that’s gotten out of hand or to pay off the truck you maybe shouldn’t have bought. Or maybe it’s a student loan that’s still looming over your head, or even medical bills that are so high the thought of them makes you sicker than whatever caused you to have them in the first place.
One of the best things you can do with your tax refund is to pay down debt, especially credit card debt
The less you owe, the better your credit score will be, and the better the odds you’ll be approved for a mortgage or rental lease. Or, maybe even more important, the less you owe the better you’ll sleep. That sounds like a good reason to use your tax refund to pay down debt, particularly high interest debt.
How best to approach paying down debt? There are two tried and true strategies:
The snowball strategy:
This is when you pay down your debts from the smallest to the largest. The thinking is that by getting rid of the smaller debts first, you’ll see and feel good about your progress, and gain momentum toward paying off the larger amounts.
The avalanche strategy:
This is when you pay down those debts with the highest interest rates first. Doing so prevents you from paying more interest down the road.
2. Fund your retirement plan
If you have a retirement account, one of the smartest things you can do with your tax refund is to put the money in it. At present, you can use your tax refund to fund a traditional or Roth IRA up to $6,500 a year. This permits your money to grow tax-free. Just don’t take it out before age 59 and a half. You’ll pay a 10% penalty, plus income taxes on it.
3. Buy life insurance coverage
Most of us like the idea of buying life insurance coverage about as much as we like the idea of paying down debt.
Buying life insurance requires facing our own mortality to a degree, and not many of us are keen on that. There’s also the concern about the money involved. “Life insurance is too costly,” some say. No. What’s costly is leaving your family in the lurch if you suddenly pass away without having any in place.
Life insurance is essential to protecting those we leave behind, so it’s smart to consider using your refund to purchase a policy sooner than later.
The process is far easier than it used to be (you can do it all online almost 100% of the time), and the policy prices may surprise you.
4. Start an emergency fund
With the economy as it is, it’s never been more important to have an emergency fund, a stash of 6-12 months’ worth of living expenses that you don’t touch unless you absolutely must.
You could find yourself out of work or faced with a large, unexpected expense. With this in place, you'll have extra spending money on hand, and you won’t have to put your living expenses on credit cards. And that means you'll escape the debt that comes from using them that could compromise your financial future.
It might not be fun to use your tax return money to start building an emergency fund, but should you find yourself unemployed or faced with a huge expense at some point you’ll be thankful you did.
If you choose to start an emergency fund, consider putting it high-yield savings accounts, CDs, or money market accounts.
You have a few options for where to store your emergency fund
You could go with putting money into a high-yield savings account or money market accounts. Savings accounts don’t allow you to write checks, but the money market will. Both are worth looking into.
5. Make an extra payment on your mortgage, student loan, or car loan
Again, it’s all about managing debt and freeing up more money for other things we need or want.
If you’re hoping to own your home or car outright, or if you’d really like to stop having to think about a student loan or student debt, using your tax refund money to make an additional monthly payment makes a lot of sense.
6. Put it away to save for a big purchase
Maybe you’d like to buy a home. Maybe you’d like to take the entire family to Disney. With the average tax refund at just about $3,000, using your tax refund to kick start saving up for these things and others like them could help you attain them even faster.
As we mentioned earlier, put your tax refund money in a high-yield savings account or money market account so your money grows, and your dreams grow closer to becoming reality.
If you don’t think you’ll need to touch the money from your tax refund any time soon, consider putting it in the stock market or into a CD (certificate of deposit). CDs earn more interest than either of the other two options. Learn more about CDs at Investor.gov.
7. Use it to improve your home or auto
Updating the kitchen or bathroom is an expensive endeavor but it’s money well spent on improving your quality of life and the value of your home. And, when you decide it’s time to sell, it’s most likely you’ll get back the money you spent on those improvements. In short, it’s a win-win situation.
Those are pretty strong reasons to consider using your tax refund toward a home improvement you’ve been putting off.
With regard to your car or truck, if every light on your dashboard is blinking, use your tax refund for maintenance. A well-maintained vehicle costs far less in terms of expense and stress.
And if you’re close to paying your car or truck off, investing in the proper repairs makes all the sense in the world.
8. Give to a cause close to your heart
If you’re in a position to donate some or all of your tax refund to a cause you believe in, kudos to you! Just make sure the entity in question meets the IRS requirements for you to be able to deduct the contribution from your taxes.
9. Invest it in yourself
Maybe you’d like to change careers or learn a new skill that would help you advance in your current one. If so, it might be best to use your tax refund to take classes, attend a conference, or get a particular certification.
All of those things are easier to do than ever before, thanks to the rise in popularity of Zoom and online education.
Yes, even conferences can be attended remotely. If you’ve got a phone or laptop and an Internet connection, a career change could be just a click away.
Consider using your tax refund to invest in yourself.
10. Buy something you really need
Does your work require you to have a decent computer? If so, it’s tough to read and respond to email - or check your bank account to see when that refund arrives! - if your computer is on its last legs. If that's the situation you find yourself in, it makes sense to use your refund to invest in a replacement.
The one thing you shouldn't use your tax refund for is wireless service. You work hard for your money and whatever amount you get back should go toward something you need -- not something Life Wireless can help you attain for free.
If you’ve never considered looking into free cellular service, this is the perfect time.
Life Wireless offers government subsidized cellular services through the Affordable Connectivity Program to qualifying individuals and families.
If you’re unemployed or participate in a government benefit program such as SNAP, Medicaid, Federal Public Housing Assistance, SSI, or WIC, you already qualify for this Federally funded free cellular service. As a participant, you receive the following, free, each month: Unlimited talk, text and data, and a free smartphone or you can bring your own.
Even if you’re paying just $20 a month for cell service, wouldn’t you rather have that $240 to put toward your emergency fund or pay down debt? It takes just a few minutes to complete the application. Do so now, and you could be cutting your monthly cell phone bill to nothing in no time.
Plus, if you’re approved for Life Wireless/Lifeline Assistance Program and sign up for the Affordable Connectivity Program (ACP), you get two sources of free talk, text, and unlimited data that you can split between two phones. That means free cell service for you and free cell service for someone you love. If your child has been asking for a cell phone, this is a terrific opportunity to provide him or her with talk, text, unlimited data and the ability to stay in touch with you!
Of course you don’t have to split the service between two phones, you can keep it all on one. But it’s a wonderful option if your spouse, child or relative needs a phone – and who doesn’t? – but has been unable to get one due to the expense.
Whichever option you choose – to keep the data on one phone or split it between two – Life Wireless will make sure you receive the free talk, text, and unlimited data to help you stay connected.
Option 1: Combine Your Data
Activate Lifeline and ACP on the same device and receive unlimited talk, text, and data, plus 5GB of mobile hotspot.
Option 2: Split Your Data
Split your data between two phones or supported devices and you’ll have one device with ACP’s free talk, text, and 6GB of data and a second device with Lifeline’s talk, text, and 4.5GB of data (6GB of data in California).
Keep more of your hard-earned money with Life Wireless. Start now!
What our customers are saying:
“Without this phone I would be lost. It has helped me stay in contact with my daughter’s specialist. I schedule her appointments and they can call back if there are any complications with her results. Thank you, Life Wireless.” Amanda Z., PA
Posted 1 year ago