7 ways to spend your tax refund that won’t give you buyer’s remorse
Although tax season can be stressful, it can also be a time of year to look forward to if you’re getting money back from the government. But, receiving a financial infusion also brings up questions on the best way to spend your tax refund — especially in relation to your other money goals. According to IRS statistics, the amount people have been getting back this year has varied. For instance, for the week ending Feb. 1, 2019, the average tax refund was $1,865, compared to $2,035 a year prior. But, for the week ending March 1, 2019, amounts were up — $3,068 compared to $3,046 a year prior. So, if you’re among those getting a return — which can almost feel like winning the lottery — what are things you can guiltlessly spend it on?
“It makes sense that most of us want to have fun with our tax refunds — this money feels like an unexpected windfall that you just want to go right out and spend,” Andrea Coombes, tax expert for NerdWallet, said in an email. “But to avoid feeling guilty about your spending, put at least some of your refund toward a financial goal.”
To her point, a recent NerdWallet survey among 2,005 U.S. adults ages 18 and older found that the majority of people do plan on putting their tax refunds toward financial goals. Here, finance experts suggested ways you can spend your tax refund that won’t saddle you with second guesses.
Start or add to your Emergency Fund
Coombes said that if you have yet to start an Emergency Fund — which is typically three to six months’ worth of expenses — you can do so with your tax refund. “Open an online savings account; they tend to have higher interest rates, currently about two percent or more,” she said. Then, put in some (or all) of your return and the account will do the rest for you by accruing interest. “And there you go; you’ve started your emergency savings account,” said Coombes.
Invest in your retirement
Although retirement may not be at the forefront of your mind, it’s never too soon to start saving — and using your tax return toward it is the perfect way to do so. “You may want to invest at least a portion of your refund into your retirement,” Lisa Greene-Lewis, CPA and tax expert at TurboTax, said in an email. “You will be growing your nest egg while lowering your taxes for 2019.” Furthermore, she said you also may be eligible for the Saver’s Credit — up to $1,000 single and $2,000 married filing jointly — just for investing in your retirement.
Coombes agreed and said that the more time your retirement money has to grow, the less you’ll need to worry about your future. For instance, when it comes to Individual Retirement Accounts, you can see which one would work best for you. “A traditional IRA will give you a tax deduction this year, if you qualify, while a Roth IRA will let your money grow tax-free, so you never owe taxes on your investment earnings (as long as you follow the rules),” said Coombes.
Pay down debt
Greene-Lewis said that a tax return is also ideal for paying down debt. “By paying down debt, you are saving money on the interest you would be paying,” she said. If you’re carrying balances on multiple cards, you can either tackle the smaller balances first, she noted, or put your refund toward the debt with the highest interest. “The latter is a better financial choice if you’re hoping to save money on the interest you pay,” said Greene-Lewis. “All in all, you can pay down some debt with part of the money and do something fun with the rest.”
Start (or finish) home improvement projects
If you’ve been putting off home improvement projects, with your tax refund in hand, now’s the time to start (or finish) them. “You can look at these as an investment since most will lead to an increase in your home’s value,” Andrea Woroch, consumer savings expert, said in an email. “And stretch your tax refund dollars further by doing some of the work yourself, such as painting walls or demo work.”
Woroch also said to never underestimate the money-saving option of purchasing gently used appliances, fixtures and other home décor from people in your community, such as through sites like Facebook Marketplace. “Set up alerts for what you’re looking for to get notifications of new listings matching your searches,” said Woroch. “You can also chat with sellers via Messenger to negotiate prices for even better deals.”
Put the money toward a side hustle or business
I know, you may be thinking: Shouldn’t a side hustle make you money, not cost you money? But some side hustles require money to start or maintain them. “For instance, use your tax refund to spruce up your car and become a rideshare driver for Lyft and Uber,” said Woroch. “Or, if you love taking pictures, buy better camera equipment and build a website to start promoting your offerings locally. The options are endless!”
Plan a trip
Perhaps you’ve been waiting for your tax return to come in so that you can use some or all of it toward a trip this summer. Woroch said you can also get creative in terms of spending it, so that you use it cost-effectively. “Look for last-minute hotel deals using apps like HotelTonight or redeem airfare rewards for free flights and use your tax refund to cover the cost of accommodation,” she said. “Plus, choose a destination that offers free activities, like beach or camping destinations, so you don’t break your budget once you arrive.”
Indulge in self-care
“In today’s busy world, we are constantly on the go,” Woroch said. “Allowing yourself to unwind and clear your mind is vital toward recharging your mind and body, all of which can have positive impacts on improving relationships, boosting productivity, creativity and more.” Whether you go to a day spa or decide to book monthly massages, the idea is to make self-care a habit. Plus, you could still put some of your refund into savings, too, and practice financial self-care as well.
At the end of the day, Coombes said the good news is you don’t have to choose just one thing to spend your tax refund on. “You can have fun with your refund and make smart money moves at the same time,” she said. For instance, you can put it toward a few different money goals, such as retirement savings, emergency savings and future travel plans. “Then, the rest of it is for you to spend however you want,” said Coombes. “Think of it as your reward for making some good money decisions.”