What To Do With Your Tax Refund: A Complete Guide

For many people, April means one thing: tax season. Although filing your taxes may not be the most fun thing in the world, getting your refund can certainly put a smile on your face. If you find yourself wondering what to do with your federal tax refund at the end of tax season, you’re not the only one.

We’ve created a list of some of the best ways to use your tax refund check.

The Best Ways To Spend Your Tax Refund

Everyone’s financial situation is different. The good news is that, regardless of your circumstances, you can likely use your tax refund to help you reach your goals. Whether you want to pay off some of your debts, save money, or invest, we have ideas for how to use your tax refund wisely.

Using Your Tax Refund To Pay Off Debt

If you want to improve your credit score or build equity, paying off any existing debt can be one of the best ways to use your tax refund.

Paying Off Credit Card Debt

While credit cards can be incredibly convenient, they are not always your friends. The consequences of credit card debt can range from a lower credit score to late fees, higher interest rates and even serious legal repercussions.

Using your return to pay off some of your debt could be a great way to start minimizing what you owe.

Paying Down Your Mortgage

“Paying down a mortgage” is when a homeowner pays more than they owe on their mortgage for that payment period. While this might seem redundant, it’s actually an important financial move for two reasons.

First, it will help you pay less in the long run. If you pay more on your mortgage now, you reduce the total amount you still owe. This means that, second, you accumulate less interest, which saves you money and helps you build home equity.

Home equity refers to the amount of your home that you own, which you can calculate from subtracting what your home is worth by what you still owe. Increasing your home equity is not only exciting because you now own more of your home and are closer to paying it off, but it also increases your net worth. Paying down your mortgage with your tax return can not only save you money on future payments, but it also adds value to your financial portfolio.

Paying Down Other Types Of Debt

If you’ve already paid off your credit card debt, you could use your tax refund to pay off some of your other debts. There are two types of debt: secured and unsecured. Secured debt is any loan that has a collateral, or something that can be taken away if the money is not repaid – like a car.

Some debt, like student loans or medical bills, do not have any collateral. Because of this, they may come with higher interest rates to encourage borrowers to pay them back faster. These loans are called unsecured loans.

Regardless of the type of loan, using your refund to pay off some of your debt can help improve your financial situation and help save you money in interest.

Using Your Tax Refund To Save

If your financial goals are more oriented towards saving, you can also use your tax return to plan for the future.

Create An Emergency Fund

You’ll never be able to anticipate everything that may go wrong, but creating an emergency fund is one of the best ways to prepare for these types of situations. By having an emergency fund, you’ll have the ability to handle unexpected life events and the extra expenses that come with them.

Using your tax refund to build an emergency fund can help you be ready when life unexpectedly happens. It’s recommended to save 3 – 6 months’ worth of your daily living expenses to cover things like rent, groceries and utilities. While that may seem like a lot, you can always start small and build your way up.

Save For Retirement

It’s never too early to think about saving for retirement. In fact, the earlier you start saving, the more money you’ll earn in interest. Most people interested in saving for retirement save their money in one of two ways: a traditional IRA or a Roth IRA fund.

It’s important to note that anyone putting their money into an IRA should be ready to part with it, since you can’t access the money until you’re 59½ or older without incurring withdrawal penalties.

Use The Money For College

Starting to save for your children’s college education now could help to avoid some of that debt in the future. One of the best ways to save for college is to use a 529 plan, a type of savings account with tax advantages. The only stipulation is that money taken from this account must be put toward academic purposes.

Putting your tax refund into a 529 plan could be a fantastic step toward your child’s education.

Using Your Tax Refund To Invest

If you’ve paid off your debts and you feel comfortable with the amount of money you have saved, it may be time to start using your money to make more money by investing it. Whether you want to invest it in yourself, your home, or the stock market, we have ideas for you.

Start A Business Or Side Hustle

If you’ve got a business idea you’ve always wanted to bring to life, this may be the time. You can use your tax return to help fund your small-business venture. The U.S. Small Business Administration has a guide to help you get started here.

On the other hand, if you’re not ready to start a full on business venture, you can invest in a side hustle that you've been wanting to pursue. Now that you have the means, investing in yourself and your goals is right at your fingertips.

Make Home Improvements Or Repairs

Another great way to invest your tax refund is by using it to add value to your home. While your tax refund will probably not be able to fund a full kitchen remodel, it could help cover the cost of some smaller projects like repainting the kitchen or upgrading your front door. While improvements to your home aren’t tax deductible, you can usually add them to the cost basis of your home.

This can potentially help you save on capital gains tax if you ever sell your house.

Invest In The Stock Market

If you’ve already maxed out your retirement savings contributions, you can also invest your tax return into the stock market. Keep in mind that any money you earn from stocks will be taxed, but you can earn more than you will through traditional savings accounts. The volatility of the stock market does keep some people away from it, since you could lose more on a given day than you earn.

However, as a long-term strategy, money invested in stocks tends to outpace inflation and can help your money retain its earning power.

The Bottom Line: There Are Plenty Of Ways To Use Your Tax Refund Wisely

Regardless of whether you want to use your tax return to pay off your debts, save for the future, or invest in something else, there are numerous ways you can use it to increase your wealth. The best option for you is going to be one that best aligns with your financial goals and needs.

For help saving, investing and everything in between sign up for the Rocket Money^SM app today to help lower your bills and track your net worth.