Raise your hand if you’re not sure what to do with your tax refund. Should you put it in your savings account? Use it to pay off a debt? Or go on a shopping spree? There are dozens of ways to spend a tax refund, but not all of them are wise. We’ve put together a list of smart ways to get the most from your 2018 tax refund depending on your family’s financial situation.
1. Eliminate your debts.
The smartest thing to do with your tax return is to pay off any debts you’re shouldering. Letting debt accumulate interest, especially when the interest rate is high, will drag down your credit score and rob you of peace of mind.
There are two schools of thought when it comes to how to pay off credit card debt: debt snowball and debt avalanche. With the snowball method, the point is to pay off your smallest debt first while making minimum payments on any remaining debts. Once you’ve paid off a card, you move on to the next smallest debt until all your cards have been paid in full. Conversely, the avalanche method calls for you to pay off your highest debts first while still making minimum payments on any other cards. Once you’ve paid off the highest debt, you move on to the next highest debt.
If your tax refund doesn’t cover all your debts, see if you can transfer the remainder to a balance transfer credit card with a lower interest rate. Debt consolidation is another option if your credit score isn’t high enough to qualify for a balance transfer.
2. Supplement your emergency fund.
Let’s say your tax refund was enough to cover your debts or you were debt-free to begin with — what do you do with your money now? The next best option is to add your tax return to your emergency fund (or even start yours). A good rule of thumb is to have at least three month’s worth of living expenses set aside for emergencies like losing a job. Of course, it doesn’t hurt to have more than that.
3. Let your money grow in a high-yield savings account.
Having a savings account separate from your emergency fund and checking accounts prevents you from “accidentally” dipping into finances that are meant for other things. Instead, put your windfall in a high-yield savings account, which pay a higher interest rate than regular savings accounts, meaning your money makes more money just by sitting there. Your best bet is to let your money sit and grow, only removing it when you need to make a specific purchase.
4. Contribute to your retirement.
It’s never too late to start saving for your retirement. While you can’t funnel your tax refund into a work-sponsored 401k, you can open a separate individual retirement account (IRA) or Roth IRA and house your money there. These tax-advantaged accounts, meaning they’re either tax-exempt, tax-deferred, or qualify for other tax benefits, can safeguard your finances so you have plenty in the bank come retirement time. Certain contributions may also be deducted from your 2019 taxes.
5. Play the Save Your Refund Lottery.
It’s tempting to blow all your refund on a trip to the mall, but you can still get the thrill of buying something “fun” while being rewarded for good money habits. Commonwealth and America Saves wants to incentivize you to save a portion of your refund by giving you entries into win weekly $100 prizes for every $50 you transfer to a savings account, IRA, bond, certificate of deposit, 529 educational savings account, health savings account, or TreasuryDirect account. You can even be entered to win one of the two $10,000 grand prizes by submitting a photo that represents your savings goal/what motivates you to save.
6. Reinvest in yourself.
If there’s a skill you would like to learn that you think would help you increase your earning potential, now’s the time to take classes. Using your tax refund to pay for courses or certifications is a great way to enhance your skill set, making you a stronger candidate on the job market. You may also be able to ask for an increase at work.
7. Consider refinancing your home.
Depending on how large your tax return is, refinancing your home may be a good option. You can use your refund to cover the closing costs and fees, which range from two to four percent of your home loan’s remaining value. This way, you can save thousands on high interest rates and reinvest the money you’ve saved to earn even more.
8. Stop putting off that home renovation.
It’s difficult to know when the right time is to finally renovate your home. If you received a sizable return from the government, you may finally feel ready to sign contracts with builders and painters. And not only will a renovation increase your enjoyment of your home, but it may also help increase your home’s resale value.
9. Pay it forward — to save later.
You can feel good about donating a portion of your tax return to your favorite charity not only because it helps someone in need, but also because you may be able to deduct your gift from your 2019 taxes. While saving money on taxes isn’t the only reason to donate, it’s a nice reward for kindness and generosity. Just be sure to check which section the organization to which you’re donating has filed with the IRS to confirm that your donation is tax deductible.
10. Splurge on experiences.
People like to have fun, which means a relaxing family vacation may be the best way to spend your tax refund, assuming you’re practicing good financial habits. Instead of shelling out for expensive big-ticket items like a new car, take a trip to Grandma and Grandpa’s house with the kids or buy concert tickets for everyone. Making lasting memories means more than material purchases.
One word of caution: Just because you find yourself with extra money doesn’t mean you need to go crazy. A $1,000 refund doesn’t give you license to spend $5,000 on a family vacation.
Your tax refund will be here before you know it (just make sure you don’t fall for this fake $40 filing fee first!), which means you’ll soon be asking yourself what the best way to spend your tax refund is. If you can come up with a game plan now, you can rest easy knowing you’ll be spending your windfall wisely.