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Sometimes you open your mailbox expecting another bill and instead find our tax refund!
Most of us think of our refund as ‘found money,’ temporarily filling our bank accounts with extra cash. But what about putting it to better use?
Instead of spending this unexpected windfall on the first thing that comes to mind, why not be smart about what you do with it?
There are plenty of creative ways to maximize the return from your taxes. Here are some real-life examples of smart things people did with their tax refunds.
Table of Contents
#1. Paying Off A Car Loan
Here is what Amanda of My Life, I Guess said she did with her refund. “Shortly after graduating, I got a $5,000 tax refund because of unused tuition credits. Thankfully I was heavily interested in personal finance blogs at the time, and was smart with this extra money. I used $1,000 to go to New York City for a week with my sister (which was the second big trip I’ve ever taken). The rest went towards paying off the remainder of my car loan. It took a lot of stress of my monthly budget.”
Amanda did something with her tax refund that I encourage everyone to do. Split it up to use it best. Take 10% and spend it however you want.
Then the other 90% should go towards paying off debt or investing for your future. This strategy allows you to enjoy the money now and benefit long term.
#2. Investing In I Bonds
Leif of PhysicianOnFire has found a unique way to invest his tax refund.
“I try not to give the IRS an interest-free loan by paying more than I owe in taxes, but if you find yourself in that situation, you can invest up to $5,000 of your tax refund in I Bonds from the U.S. government, which have been paying a great interest rate for the past couple of years. What makes this a unique proposition is that individuals are normally limited to $10,000 in I Bond purchases per calendar year, but you’re allowed up to an additional $5,000 equal to the size of your tax refund.”
I Bonds are a safe way to invest your money and a great short term savings option.
#3. Spending On Experiences
One of the best uses of your money is to spend it not on things but on experiences. This is what Alex of DelishKnowledge did.
“When it comes to spending money, I’m prefer to focus on experiences over disposable things. With two younger kids, we took our tax refund last year to purchase camping equipment– a family-size tent, sleeping bags, trekking poles, and hiking backpacks. We knew that grabbing all of those items would be an investment, but once we had the gear– there’s no reason not to start exploring. We’ve since been on 5 camping and hiking adventures and have 4 more planned for this summer, including the Mighty 5 parks in Utah. Using our tax refund to invest in continued family vacation opportunities was a major win.”
While spending money on things is nice, this one-time purchase will repeatedly pay for itself in trips and priceless family memories.
#4. Dividend Paying Stocks
Investing is great. But investing in dividend-paying stocks is even better. Why? With dividend stocks, your investment grows over time, and these stocks pay you in the form of dividends every quarter. So four times a year, you get paid.
Granted, this money won’t be life-changing, but it adds up. Josh from TopDollar says, “I invested it into high dividend-yielding stocks, now I receive over $1,000 per year in dividends from that investment.”
What could you do with an extra $1,000 a year? You could spend it. Or you could use it to buy more shares. This results in your dividend payments increasing as you own more shares. So $1,000 a year now could turn into $5,000 a year or more in the future.
#5. Contributing To A Roth IRA
Saving for retirement is an excellent use of your money. R.J. of TheWaysToWealth says, “It will sound cliche, but my biggest tax refund win was using it to max out an IRA. I don’t mind overpaying taxes yearly, as it’s forced savings. Plus, I don’t have to deal with the stress of owing the IRS money and whether my estimates were correct.
The nice thing about tax refunds, or any windfall for that matter, is that doing something smart with the money requires one good decision. There’s no willpower needed over long periods of time. There’s no second-guessing myself if I did the right thing. Once the decision is made, it’s done and I can move on.”
#6. Paying Off Credit Cards
We all know the impact credit card debt has on us. Not only is it costly from a financial standpoint, but also from a mental standpoint. Waiting for the bills to come in the mail, wondering how you will pay the bill, and more all add stress to our lives.
Therefore, a great use of your tax refund is to pay off the debt. This is what Skye of ThrivingAndInspiring did. “I used my tax refund to pay off my credit card debt. This helped me work toward being totally debt free!”
Whether you use the debt snowball method or another strategy to pay off your debts, the most important thing is to get rid of them. Then you can go from paying someone else every month to paying yourself.
#7. Becoming Debt Free
Having goals in life is critical for success. Bridget from WorkAtHomeSavvy had the goal of becoming debt free. Her tax refund was an essential part of reaching that goal.
“I used my tax refund to pay off credit card debt. Was it the most exciting way to spend the money? Definitely not. But was it worth it? Absolutely. With the payoff, I was able to become debt-free once and for all, and this had big benefits, not just financially, but also mentally. It felt as if a weight had been lifted off my shoulders, as I no longer was in the constant cycle of paying what I could while watching interest accrue. Using the refund to pay off the debt finally allowed me to allocate some extra money to other areas of my budget that needed to be built up.”
#8. House Down Payment
Putting your refund money into an asset that helps build wealth is wise. This is what Clifton from CliftonCorbin did.
“Putting my tax return towards buying my house was the best thing I’ve ever done with my tax return. When my wife and I found out we were expecting, we knew our little shoebox of a condo was not where we wanted to house our growing family. But saving enough money for a down payment can be overwhelming and time-consuming, especially in a city like ours. Using our tax return helped to speed up that process and got us into the house we are still in today. It was the best thing I could have done with my refund.”
#9. An Education
Having a windfall of money is tempting to spend it irresponsibly. Luckily for Don of RealEstateAdventurer, he overcame this temptation and put his refund to good use.
“In 1992 I was a recently unemployed 25-year-old loser living with my parents. I had nothing going for me, but I did get a $1,200 tax refund from my previous job. This huge windfall was exciting, and I almost used it to throw a party. At the last minute, I wised up and used it to return to school. By 1996 I had a degree in computer science, which started my career of over 25 years as a software developer. This small tax refund was a major turning point allowing me to start a family and live a prosperous life. I have a daughter, who turned 18 last month, and she may not have even been here if it were not for that tax refund.”
#10. Getting Rid Of A Payday Loan
The idea of a payday loan is intriguing. You get the money you need early to help you with your finances. But the interest you pay is sky-high, and many people who take one out get stuck in a cycle they cannot break free from.
Luckily, Shantell of TheFrugalGirlGuru used her tax refund to break this cycle and thrive. “I used my tax refund to get out of the cycle of a payday loan and started my journey to budgeting and saving money. This lead to me building my credit and purchasing my first home. I have since then left my 9-5, started my blog and a janitorial management company. I have to say this was all because I made a good decision about how I would spend my tax refund that year. It was a win-win for me.”
#11. Building An Emergency Fund
The most boring thing you can do with your tax refund is to put it into a savings account. But that is what I did when I was working on improving my finances. A few years before, I bought my first house (at the housing bubble’s peak) and quickly realized I could not afford it. A friend moved in with me to help offset some of the bills. But I still got into financial trouble.
Eventually, I paid off the credit cards and had to rebuild my emergency fund. So that is where the money went. As I said, it wasn’t the most glamorous thing to do, but it was the smart thing. And it helped me to get further ahead financially.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
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