How to Spend Your Tax Refund This Year: 12 Smart Things You Can Do

Are you among the 70 percent of taxpayers expected to receive money back this tax season? If so, you may be wondering just how to spend your tax refund.

Last year, the average refund was just around $2900 — which is no small amount of change. Whether you are expecting a similar amount or even just a few hundred dollars, you essentially have two choices when it comes to spending your tax refund: you can blow it, or you can leverage it.

Spending the money on something fun and frivolous is not a bad thing if you are in a position to do that. But before you do, take a look at one of these suggestions when figuring out how to spend your tax refund.

1. Get Caught Up on Bills

If you are behind on any of your bills, an excellent use of your tax refund is to get current. If the refund is not large enough to cover all of your bills, begin by bringing your mortgage or rent current followed by your utilities.

2. Establish or Add to An Emergency Fund

Consider starting or padding a beginner emergency fund or working on a full emergency fund of three to six months of expenses.

3. Pay Off Debt

Take advantage of your windfall to make a dent in your credit card balances, student loans, car loans, or other debt. Don’t forget about any money owed to friends or family. If you are consumer debt-free why not use your tax refund to pay extra on your mortgage? (Be sure the entire amount is applied to the principle and not to prepaying interest.)

4. Get One Month Ahead in Your Rent or Mortgage

A good use of your tax refund is to get one or more months ahead on your rent or mortgage (or any other bills for that matter). You’ll appreciate the feeling of having a little breathing room in between your paycheck and your due dates.

5. Put it Towards a Future Purchase

If you anticipate a large purchase such as furniture, an appliance, etc., in the near future, why not give your savings a boost?

6. Pre-pay Insurance Premiums

Do you pay your car, homeowners, or renters insurance monthly? Consider using your tax refund to pay the premium in full. You’ll save money in the process!

7. Start a Sinking Fund

Are you a couple of years away from needing a new car or doing a major repair in your home? Establish a “sinking fund” with your refund. (Bonus: Give your sinking fund an additional boost with a $25 bonus when you save it in a no-fee Capital One 360 Account.)

8. Invest It

A smart use of your tax refund is to invest it. Open an IRA, add to an existing one, or see these other ideas for investing your refund.

9. Donate It

Consider giving all or a portion of your refund to your church or a charity, especially if you’ve been “meaning to give” throughout the year but never got around to it. You’ll also be able to deduct your donation when you file your taxes next time around.

10. Give It Away

Feeling generous? Put your refund to philanthropic use by just giving it away. You can have fun with this and give in creative ways, from surprising strangers to giving to someone you know personally to paying for a student’s classes or tuition bill.

11. Invest in Yourself

A great way to spend your tax refund is to invest in your personal growth or career development. Continuing your formal education, taking classes, or going to a conference are all ways to spend the money that promise future returns. Check out these 12 free or low-cost ways to invest in your career.

12. Have Fun with It!

Putting your tax refund towards something fun like a vacation or a purchase can also be a great use of it — provided you are in a position to do so.

If you are current on your bills, debt-free, and contributing to your retirement, why not splurge a little? Just make sure you’re doing it responsibly and not incurring additional debt or neglecting other obligations.

Don’t Get a Tax Refund Next Year

After you’ve decided how to spend your tax refund this year, turn your thoughts to next year. Receiving a tax refund may feel a little like winning the lottery, but it is anything but. Getting a refund means you overpaid your tax obligation throughout the year and allowed the government to use your money interest-free.

With the average return being close to $3000, that is approximately $250 a month that could (and should) be in your pocket.

To put things in perspective, it is just like sending your mortgage company or electric company an extra $250 when you pay your bill each month and telling them to hold on to it for a year. You would never do such a thing, right? Well, getting a tax refund is essentially the same thing.

Of course, you don’t want to swing the pendulum too far and owe the IRS money. Ideally, you want to have the right amount of tax withheld from your paychecks throughout the year.

You can do this by using the IRS’ tax withholding calculator. It will walk you through what your withholding should be. It is best to adjust your withholding only if you consistently receive a refund year after year and not because of a particular event or change unique to this year.

Are you expecting money back this year? Have you already decided how to spend your tax refund?