It's official: Tax time is now among us, and April 15 is approaching. Though plenty of us will end up owing money to Uncle Sam when the time comes to figure out what that bottom line looks like this year, others will be receiving a nice tax refund — and depending on how much the total ends up being, it can end up serving as a nice little windfall that can definitely make a difference in our finances for the year ahead. There's only one question, though: How do we spend it?
As tempting as it would be to blow the whole thing on fun stuff, like maybe a fancy vacation or blowout day at the mall where nothing is off limits, there are also a lot of responsible ways to spend tax money that will be even more gratifying (even if they're not quite as satisfying as filling the car with a bunch of tiny but expensive bags from Sephora).
In the long run, it's a good option to use this money for something that's seriously needed around the house, or to pay off debt or add to a savings account. There are a lot of options for what to do with that nice check from the US Treasury, but sometimes, all those options can become seriously overwhelming. Which ones are the best?
Just in case anyone's in need of ideas, here are some different ways to use that refund check responsibly. It's a tough decision, but with any of the options below, it's hard to go wrong.
Pay Off Debt
This is probably the most obvious way to use a tax refund, and it's because it makes a lot of sense. Whether that debt is credit card debt or not, it's never a bad idea to sock away a chunk of money into paying off what's owed — especially if that debt comes with a high interest rate. Ultimately, this will end up saving money in the monthly budget, so put those tax refunds to work!
Put It in a Savings Account
Saving the money is another obvious option, but that's because it's also a solid one. No matter what that savings account might be for — an upcoming vacation, expected expenses, emergencies, or just a general savings — it's never a bad idea to put the money away if it's not something the family needs access to immediately. And if a need does arise, it'll still be there.
Add To a College Fund
For those of us who are hoping to contribute to our children's future education, using a tax refund for either starting or adding to a college fund definitely isn't a bad idea. For anyone starting from scratch, opening a 529 plan isn't a bad idea, and maybe the initial investment will help to encourage parents to continue to add to the account every month. As a bonus? That money isn't subject to tax itself!
Add To a Retirement Fund
This could mean opening up a Roth IRA or starting a retirement fund for the first time, but there are few better ways to put that money to work other than investing in the future. Retirement seems like it's a long time off (way too long, for most of us) but that time will come eventually, and in the future, we'll all be thankful for anything and everything we've managed to save towards it.
Upgrade Appliances
It can be hard to sink money into a new appliance (who wants to say goodbye to a huge chunk of money all at once?) but it's so necessary sometimes. If there's an issue going on, like a fridge that's on the fritz or a washer and dryer that will definitely be done for in the next few months, consider spending the tax refund to upgrade or replace appliances around the house that are on their way out.
Buy Whatever's Been on the Back Burner
Responsible purchases are just that — way less fun than spending extra money on Starbucks runs or vacations. But this is a great chance to take a tax refund and finally buy everything that has been put off, whether that's new clothing to add to a tired wardrobe, working on the landscaping in the yard, or getting everybody in the family new shoes. It'll be such a relief to knock that kind of stuff off the list.
Make Home Improvements
It's not a bad idea to use the money to make improvements around the house, either. Not only will it make living in the home even better and feel satisfying to have all the stuff that's been put off taken care of, but it could also ultimately end up adding value to the home itself, which could end up being quite a good investment when the time comes to sell and move.
Get Ahead on Future Expenses
Nothing pressing going on now, but know that something important is coming up? This could be anything from wanting to prepare for a new baby who's on the way (or may be on the way soon) or being aware that some medical bills for an upcoming procedure might be showing up in the next few months. Put that money aside, and use it for that instead — it'll reduce the stress when the day the money is due finally arrives.
Create an Emergency Fund
For those don't currently have an emergency fund, start one with a tax refund check. So many things happen that we can't predict, including unexpected unemployment, so why not set aside the money for those "what if" scenarios? It's inevitable the family will need the money someday, and it'll stop the need to take out a loan when that day finally does come.
Invest the Money
This could mean something different for everyone, but investing a big chunk of money like this could be smart in the long run. If the stock market doesn't feel right, maybe putting the money in something like a CD would work? Either way, it's not a bad idea to talk to a financial advisor and do some research about what the best option might be — and when tax season 2021 rolls around, one can always add to that investment.
Make an Extra Mortgage or Car Payment
It's never a bad idea to get ahead on mortgage or car payments — especially in the case of a car payment, where a solid contribution towards the principal could actually end up knocking down the payoff date by a couple of years. The gratification won't be quite as instant as it would be for those who buy something new, but it'll be worth it in the long run for sure.
Donate It
Not in a place where the money is truly needed? There's always an option to donate it to an important cause — and no, that's not an irresponsible choice at all. It will bring the warm fuzzies for making a difference, and the money will go somewhere it can be put to good use. And of course, that means it's tax deductible next year in most cases, which definitely doesn't hurt.
Pay It Toward Student Loans
For most of us living in the United States, we have student loans that we'd like to get out from under sometime in the relatively near future. Why not take the money and make a payment on the principal? This will help cut down on interest and reduce the life of the loan, making the day they're paid off closer than ever. So satisfying!
Use It for a Career Boost
Looking for a way to turn this chunk of money into even more money? It might not be a bad idea to use it to invest in one's own career. If there's a course, continuing education, or even a college class one can take, or maybe a different license that would boost the resume, using the money for something like that is a pretty good investment — and it could lead to salary increases or better job offers in the future.
Invest in Oneself
It's not irresponsible to use the money on oneself if there are ways self-care has been neglected (and what parent hasn't done that before?). Go to the dentist for that cleaning, get a new hair style, or seek out whatever one has been putting off all year long. That investment will pay off in the long run — in better mental or physical health and the relationship with the kids.
Don't Use It at First
Not sure what to do with the tax money? The best solution, then, is to do nothing at all. Move it to a savings account or somewhere safe until there's a decision on the best way to use it, and in the meantime, don't spend it. There's no deadline to figure out where that money would best be put to use — take all the time necessary to figure it out.
Save for Something Fun
When it comes to mental health and happiness, it can also be responsible to save up this money for something fun. Maybe that's a vacation fund, or maybe it's buying something that's a want, not a need, like a bigger TV or a fancy piece of kitchen equipment. Either way, allowing oneself that kind of happiness can be responsible all in its own.
