The 5 BEST Ways to Use Your Income Tax Refund

Tax season is here which means that you may get an Income Tax Refund! If you’re one of the 100.4 million Americans that received a tax refund last year, you probably expect to get that extra bit this year as well.  This is exciting! Who doesn’t love extra cash? But what do you do with it once it’s deposited? I’m going to share the 5 best ways you can use your income tax refund.

The average tax refund in 2019 was a little under $3,000, with the total tax refund payouts equaling $274 billion [source].  For some families, that’s close to a monthly income, a credit card balance, or a fun family vacation. So how do you decide what do to with this suddenly found money?

What Are the Best Ways to Use Your Income Tax Refund?

Let’s put this in perspective a little – the total US Credit Card debt is around 1 trillion dollars [source]. So, in a perfect world, if everyone just put their tax refund towards paying off their credit cards, it would take around 3 years to pay off all US credit card debt. All of it.

But with each passing year, that debt number increases despite this annual injection of money each year.

This year, let’s change that. Let’s do something better with our tax returns than buying a bigger TV.

How can I use my tax refund wisely?

1. Start your Emergency Fund

Square one for any budget is setting up an emergency fund. In my opinion, this is even more important than paying off your debt because having a fully-funded emergency fund is a safeguard that will keep you from using your credit cards in the future.

While there are many ways to acquire your emergency fund without a second job, you can fast-track the whole process with your tax refund. One huge trick to making an emergency fund work is to keep it completely separate from your other money. This means (1) keep it out of your checking account so you don’t accidentally spend it. And (2) keep it separate from your normal savings account so it’s actually there when you need it.

A note about your emergency fund: since the idea is using this money in an emergency, it means you need quick access to this.

2. Start thinking about retirement with a Roth IRA

If the thought of investments confuses or overwhelms you, that’s ok. If the thought of saving for retirement just discourages you, don’t worry. Roth IRA’s are a simple, but amazing way to help set you up for retirement! And when you use your tax refund to help, it will be pretty painless.

Here are a few of the main points that make Roth IRA’s so great:

1. They have a good interest rate so you can see growth on your investment.
2. It is Tax-Free!
3. You might have to pay a penalty if you pull it out before retirement age. This is a good thing! It encourages you to leave that money for your later years when you’ll really need it.

Betterment has a great tool to help you invest in a Roth IRA and start planning for your future.

Should I use my tax return to pay off credit cards?

3. Consolidate and/or Pay off your Debt

Getting free from debt is a building block to planning a brighter future. It’s unfortunate that so many Americans graduate from college with more than a degree, they get the added bonus of being saddled with debt. We can all do the math. Between school loans and credit cards, many of us look back and realize we’re in a pickle.

Don’t get crushed by it. It was never the plan for your life to be crushed under debt. Start taking steps to push back! Use that tax return as a little push to get you started. I would start your debt payoff with your lowest balance first and work from there up to the higher balances. This will reduce the number of cards you have to keep track of and encourage you to keep going.

I’ve also created a debt payoff toolbox which is a wealth of resources that includes everything you need to create your own personalized debt payoff plan! You just plug in your balances, interest rates, what day you’d like to be debt free, etc., and it does all the work for you!

But honestly, trying debt consolidation may give you the best of both worlds. You can simplify your payments, your APR’s, and focus your tax refund in one place. Credible and SoFi are two of my favorite Student Loan Debt consolidation options. If you’ve never considered consolidating your student loans, it may be a massive help.

To consolidate your credit cards I recommend Marcus.com. It has excellent options for credit card debt and personal loans that could be a great solution to your specific situation. A lower APR and more payment flexibility are something worth considering. You could be out of debt faster than you thought

What should I buy with my tax refund?

If you are really itching to spend money and already have an emergency fund in place and retirement and debt payoff in place, these are some of the best ways you can use your income tax refund for splurging.

4. Save for a Vacation

One of my favorite family vacation memories was our trip to Montego Bay Jamaica! Being at an all-inclusive resort in the Caribbean was magical! But, honestly, what’s even more amazing is that we paid for the trip with the money we saved! When we got home, the only thing waiting for us was our laundry to catch up on… NOT a credit card payment.

If you want to go on a vacation, save up for it! Your tax refund can give you a little head start that will motivate you to keep saving for it.

I know you work hard. I have no doubt that you deserve a vacation. But, I’d like to suggest that for the sake of your budget, maybe deserving a vacation isn’t enough of a reason to just take one and pay for it later (with interest).

Earn your vacation by intentionally saving up for it and paying for it with cash! And once you’re standing on that sandy Caribbean beach, or looking up at that Disney Castle, you can take a deep breath and say, in all honesty, “I’ve earned this.“

5. Start Saving for your Next Car

Cars don’t last forever. They will break sometimes. That means someday you’ll need a new one… I mean new to you, NOT brand new off the lot. If you know that someday you’ll need to replace your car, it might be a good idea to start planning now. Right?

What if you didn’t have to make payments on your next car and you just bought it outright? We bought a new (to us) minivan with cash last year. Not having any car payments in our budget freed us up to save for and focus on other things! It was so worth it to not have that extra debt!

Summary

I’ve heard people refer to tax refund season as “Poor Man’s Christmas.” While it can feel like that, I want you to start thinking of your tax return as a tool to invest in your future and not a 2nd Christmas.

There is a verse in the bible that talks about how ‘seed is for the sower, and bread is for the eater.’  In this context, start to think of your tax return as the seed. If you eat seed, it won’t fill you for very long, and in the long run, you’ll have less than you expected. But if you take this same seed and sow it into your future, you’ll get to watch it multiply and grow, and start to work for you!

The best ways to use your income tax refund to make it work for you:

1. Start an emergency fund if you haven’t already.
2. Invest in a Roth IRA.
3. Pay off credit card debt; you may even consider consolidating to make your payment go further.
4. Save for a family vacation.
5. Save for your next new car.