Saving Money, Tips

10 Responsible Ways to Spend Your Tax Return

Want to discover 10 Responsible Ways to Spend Your Tax Return? You’ve come to the right place!

Well, tax season is finally over! Chances are pretty good that you’ve received your tax return by now and it’s probably a significant windfall for you.

If you are no longer a college student that has already earmarked that money for rent, you may be thinking, “how can I spend my tax return wisely instead of blowing several thousand dollars on concerts like last year?”

Well, you came to the right place! Here are my favorite, financially responsible ways of spending my tax return. To make the decision-making process easy, I organized them from what I would consider an immediate priority to more “fun” ideas.

1. Use your return to build an emergency fund

pile of pennies representing tax refund
Experts recommend an emergency fund large enough to cover 3-6 months of your expenses!

Hopefully, you already have one of these bad boys! If not, this the best way to get one started. I recommend having your return deposited directly into an account that is separate from your day-to-day checking account.

If you don’t have one yet, start small and try to save at least your first $1,000. Ideally, your emergency fund should be large enough to cover all of your monthly expenses for 3-6 months.

Saving your whole tax return should get you most of the way to this goal with minimal effort on your part!

Still haven’t filed your taxes? Use TaxFreeUSA for free federal filing!

I’ve used it every single year that I’ve filed taxes and I am done in less than an hour. To help me build my emergency fund, I have them direct deposit my refund into my savings account.

2. Pay off your credit card debt/high-interest debt with your return

High-interest debt is interest rate above 6%

You should prioritize paying off credit card debt above other debts because credit cards typically have the highest interest rates. The APR for many credit cards is in the 17-20% range. Now compare that to the rate for federally issued student loans, which is typically between 3-5%.

The interest rate on your credit card is typically FOUR TIMES that of your student loans. This also means that you could end up paying around $20 in interest for every hundred you spend on your credit card if you pay only the minimum balance due every month. Ouch!

3. Pay off your student loans/ other medium-interest debts with your return

Though the interest rates are certainly more favorable than credit cards, that doesn’t necessarily mean you want to keep paying them for 10 years!! 

For some people, you may consider investing that money instead but for most people having less monthly bills due is a peace of mind you just can’t put a price tag on. Either way, paying down loans is unlikely to be something you regret doing.

With Tax Free USA, you can file your refund in less than an hour and have your refund direct deposited in around two weeks! I every year I use my refund to pay down my student loans using this method.

4. Use your return to bulk buy/ pre-pay for necessities

toothbrush with toothpaste you should buy with tax refund
Did you know that the American Dental Association recommends changing your toothbrush every 3-4 months? Bet you have had yours longer than that, you nasty!

This is one of my favorite steps because it lowers the number of times I have to pay for things every month.

Just because I budgeted for my phone bill, doesn’t mean I want to pay for it every month. And I for sure don’t want to have to fetch toilet paper every month either! 

This one should be pretty self-explanatory. If it’s not, I recommend checking out my article on the, “4 Best Financial Tips for 2020“. In this article, I explain why I love buying in bulk and how you can get started in a few easy steps!

5. Max out your ira OR live off of your tax return for a few months while you front-load your 401k!

This can save you money in taxes for next year and is an excellent way to begin growing your return through investing. 

Sometimes I use large windfalls as a bit of a savings game: How long can I make this money last?

I set a reasonable budget and then I try to beat it by being extra frugal for a month or two. This is great because you are able to save more of your 9-5 earnings in tax-advantaged spaces and reset your mindset towards saving if you haven’t been as frugal over the last few months.

In 2019, I filed my taxes with TaxFreeUSA while traveling the world! I had my refund direct deposited and used it to pay my student loans for most of the year.

6. Start saving for a house down payment with your return

house downpayment via tax refund
Depending on the kind of mortgage, you can buy a house with as little as 3% down! This means that your return could be almost all of your downpayment!

You know, if you live in a city where houses are still affordable and think you may want to own a house one day.

Buying a house isn’t in the cards for everyone, but if homeownership is something you’ve always dreamed of then saving your tax return will probably get you 25% of the way towards your downpayment.

If you are curious to crunch some numbers on homeownership, I recommend checking out Nerdwallet’s Rent vs Buy Calculator. Real Estate is not a great investment for everyone but, done properly, it can really accelerate the growth of your net worth over time.

7. If you have no debt above a 5% interest rate, maybe you want to treat yo’ self (within reason).

Contrary to popular belief, splurging CAN be part of responsible spending. If you think about it, saving money is similar to eating healthy. As long as you are eating your veggies and have a balanced diet most of the time, don’t be afraid of the occasional slice of cake.

In fact, many people can experience savings fatigue and end up binging with their finances in a way that is similar to people cheating on their diets! Don’t be afraid of enjoying your money a little, just budget for it first and take care of your bills.

Maybe spend the money on a new experience like visiting a foreign country! Or plan for your monthly “fun activities” so you don’t blow your budget every month on concerts….

8. Seed funding for starting your own business or side hustle with your return

Sometimes you gotta risk it for the biscuit. And I think the money you should risk is your return money since it is extra income outside of your budget.

This is what I did with my 2018 tax return! This return paid for almost 3 months of my expenses abroad thanks to visiting countries with a more affordable cost of living than my own and because I got a larger than average return.

I have been using FreeTaxUSA to file my refunds since before I started this blog. They were recommended to me on the IRS website the first time I was filing my taxes and I’ve used their easy platform every year since.

9. Further your education

There are so many different ways to improve your financial situation. One that often gets overlooked is learning new skills beyond your 9-5. You can choose to learn more skills related to work or begin learning skills in something you are passionate about that could result in a side hustle.

Either way, you probably won’t regret getting a professional certificate, learning a language, or obtaining some sort of license for a side hustle (e.x. A real estate license!). The best part? Many companies are now funding some of their employee’s educational pursuits and might be able to foot half the bill for you!

10. Tithe/ give back to the community

Turns out, you don’t just have to blow through your tax return by spending on yourself! Who knew?

Many people choose to give through their churches or schools. Personally, I prefer to give to programs that I know are underfunded and that I have a personal connection with. In the past, I have given donations to my alma mater’s student funds for my major (rhetoric), LGBTQ services, Bear Walk (campus safety), and the homeless student’s fund.

I used to work in fundraising and I can assure you that any amount you give makes a huge impact when combined with the donations of others. If you only have $10, give $10. If you can, try to make small recurrent gifts monthly instead of saying, “oh, I’ll give when I can”. 

And guess what! Your donations could be tax deductible!

In Summary

I hope this list gave you some ideas on how to spend your tax return in a financially responsible way! You don’t even have to limit yourself to one of these since your return is likely to be a few thousand dollars.

Also, I really love TaxFreeUSA for their free federal filing and refund optimizer. One year I got more money back just because I was a California renter and qualified for some credit I had never even heard of!

I have nothing but great things to say about their website and I hipe you give them a try!

Please don’t forget to subscribe for my monthly personal finance updates!

Kathryn Rucker is a sales consultant and content writer. With 7+ years of sales experience, she is passionate about helping businesses and individuals grow their sales pipelines by improving their online presence.

She has been traveling full-time since 2018 thanks to the location and financial independence she has gained from her business, Rucker Sales Consulting. You can connect with her on Linkedin!

Kathryn Rucker is a sales consultant and content writer. With 7+ years of sales experience, she is passionate about helping businesses and individuals grow their sales pipelines by improving their online presence.

She has been traveling full-time since 2018 thanks to the location and financial independence she has gained from her business, Rucker Sales Consulting. You can connect with her on Linkedin!

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