16 Ways Not To Blow Your Tax Refund

It’s that time of year again. That time when Uncle Sam returns some of your hard-earned tax dollars that he’s been borrowing at zero-percent interest. Tax refunds are sort of a forced savings account for many people. And while I personally aim to avoid receiving a tax refund, there are some smart things to do with one once you receive it.

Kimberly Lankford, contributing editor at Kiplinger’s Personal Finance magazine, put together five smart uses for your tax refund. I’ve expanded on her ideas, and added eleven of my own to the list below.

Smart Things to Do With a Tax Refund

  1. Pay off high-interest credit-card debt. Kimberly listed this one first, and for good reason. Eliminating credit card debt is one of the smartest ways to spend any windfall. The higher the interest rate on your debt, the bigger the payoff. Think about it; where else can you get a guaranteed return of 22% on your money?
  2. Rebuild your emergency fund. Thanks to unemployment, underwater mortgages, and a general economic funk, many households have had to turn to emergency funds to weather the storm. It makes sense to allocate some or all of your tax refund towards covering future emergencies.
  3. Boost your retirement savings. If your debts are paid, and you have plenty of money saved for emergencies, the next biggest bang for your refund buck is to invest in your retirement. Maybe that means funding a Roth IRA, if you are eligible. If not, drop the money in a savings account, increase contributions from your paycheck to your 401k plan, and use the savings to offset the difference.
  4. Build your college savings. It’s tough to carve out retirement savings, college savings, and put a roof over your family’s head and food on the table. After all, there are only so many dollars to go around. Boost your kids’ college savings by opening a 529 college savings plan (here’s a look at the best 529 plans).
  5. Help your kid save for the future. If you are the parent of a teenager that earns an income, did you know you can help them open a Roth IRA? No kidding. The only requirement is that your teen files a tax return. He or she can invest in a Roth IRA up to their earnings, or the maximum yearly contribution, whichever is smaller. So, if your daughter earned $1,800 last year babysitting, kept meticulous records and files a return, you could gift her $1,800 to invest in a Roth IRA. She’ll be well on her way to becoming a millionaire.
  6. Start a side hustle. Ah, the infamous side hustle. Many of the world’s most successful entrepreneurial efforts were started on less than $1,000 (I started Frugal Dad on less than $50!). Use your tax refund to seed a business you’ve always dreamed of running.
  7. Invest in a home improvement project. Lean towards projects that improve your home’s efficiency long term. For instance, installing a programmable thermostat and planting a few trees around your property will go a long way towards reducing your future monthly energy costs.
  8. Open a “Car Replacement Fund.” Let’s face it; the car you are driving now will eventually die. Why not divert a little tax refund money to start a car replacement fund. If your current car is paid for, save what amounts to be a car payment in this account and when the time comes you can pay cash for your next car.
  9. Build a square foot garden. Use a couple hundred dollars of your tax refund to purchase gardening supplies, soil, and seeds. Now’s a great time to plant, and soon you’ll be enjoying tomatoes right off the vine, instead of those shipped across the country in your grocer’s produce section.
  10. Give it away. If you’ve been considering giving money to a charity, now is a great time. Donating your tax refund to a worthy cause can even help on next year’s taxes, as most charitable contributions are tax deductible.
  11. Pay extra on your mortgage balance. We personally plan to pay off our mortgage early. Why? Because we value the freedom a debt-free lifestyle affords. Sure, we’ll miss a tax break or two, but I’d gladly end sending $14k to my mortgage company each year to save $3k on my taxes.
  12. Get your will done. My wife and I recently updated our wills after a death in the family. Identifying guardians for your children, and disposition of your stuff in the event of your death is not fun, but it is absolutely necessary. If you have kids and do not have a will, stop everything, financially, until you have enough saved to visit an attorney and have one drawn up. It is that important.
  13. Purchase a gym membership. Many gyms offer significant breaks for those that opt to pay one year in advance. My gym offered two free months and waived the registration fee if I agreed to pay for the full year, effectively shaving $90 off my annual gym costs. Be sure to check out the gym’s refund/cancellation policy before agreeing to such a long commitment.
  14. Take a class. It doesn’t have to be an academic class, but it could be. Maybe you’d like to learn more about cooking, or self-defense, or real estate. Investing a little tax refund money in yourself can go a long way.
  15. Go on a “paid-for” vacation. My family recently enjoyed our first cash vacation, and it was awesome! I didn’t have any bills to dread on the ride back home.
  16. Create your own “car insurance savings account.” If you currently have a $250 or $500 deductible on your car insurance policy, consider raising it to $1,000 and parking $1,000 of your tax refund in a dedicated savings account. You’ll enjoy a permanent way to save money on car insurance premiums, and earn a little interest on your savings account.

If you’d like to avoid getting a large tax refund next spring, and instead get a boost to your take home pay now, check out the withholding tool at Kiplinger.com.

Clear out financing and tax issues with a San Diego tax attorney.

Comments

  1. Great advice!
    I am thrilled that you have included giving in your list. A great reminder that we should always think about others. We got about $600.00 and we had made the decision that it will all go to pay for life insurance- and that is what we did.

  2. Excellent suggestions! I’m particularly enthused to see that you addressed getting a will done (too many people put this off), paying off debt, and suggest emergency savings. These should be # 1 priority for everyone. Yet, unfortunately, a lot of people will rush right out to the big box store to pick up a 60 inch wide-screen.
    On another note: did you see the articles online yesterday about government finally having to pay back the Social Security IOU’s? The ramifications of this would be an excellent topic for a future post.

  3. Great list! I always deposit 90% to 100% in my savings account. I purposely use my tax refund as an unexpected windfall (rather than including it in my buget). After I deposit the refund in my savings account, I enjoy the psychological boost of exceeding my planned annual savings.

    Additionally, it sometimes motivates me to save more, and I increase my monthly savings targets for the year

  4. 17. Make adjustments to your withholding so you don’t get a tax refund and siphon that cash into something that will pay interest.

  5. Good ideas. If I end up with a refund, I’ll put it toward my 2010 Roth. (Or possibly our first quarterly taxes — we’ll see how that goes.)

  6. We didn’t get a refund; we owe $1400. But the money has been sitting in my savings account all year earning interest. Not much but not nothing.

  7. Excellent list. Great for getting the mind working about different possibilities for these funds.

    My opinion on tax refunds is that its great to operate in such a way that you do not count on them. Sure, you might know you’ll be getting one, but don’t think about it or factor it in when budgeting. Think of it as a bonus. Not everyone necessarily has that luxury, but I think its better for one’s peace of mind to do it that way, where you aren’t counting on it.

  8. Sadly, too many people treat their IRS refund as a savings account to spend on a vacation or other indulgence, instead of using it to create a better financial future. I think that the goal is to minimize your taxes and to not get a refund. Otherwise you’re giving Uncle Sam too much money.

  9. I just got my refund. I actually got the $8,000 first time homebuyers credit. Plus a small refund.
    I give 10% to my church.
    Another 10% as an offering.
    Then, I am using for a new roof (we bought a house last year and knew it needed a new roof.)
    I also will pay off my one debt ($1,500 to my dad.)
    With any remaining money I will be living off until Sept.
    Also $1,000 is going towards car repair fund.
    Oh and some mad money for a steam cleaner and garden supplies. I really go big. LOL!

  10. That’s why we should not just do our personal financial planning, we should also do our tax planning. In our country – tax refunds are hard to claim, unless you claim it as a deduction against your future taxes.

  11. Terrific work! This is the type of information that should be shared around the web. Shame on the search engines for not positioning this post higher!

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