April 15th is will be here before we know it, so we’ve compiled a list of 10 smart ways to use your tax refund this year! If you’re like 70% of Americans, you’ll receive a refund. On average, current tax refunds come in around $3000 per family  which is a pretty nice chunk of change. Granted, $3000 may not totally turn your world upside down, but there are smart and unsmart ways to use your tax refund.
There are loads of possible smart options for using your tax refund. Of course, there’s no one-size-fits-all solution. Like most decisions in life, it all depends! It depends on your life stage, risk tolerance, and current financial position.
So, before you file your taxes or get that return, read through our best tips on how you can use your tax refund, no matter how big or small, to help you achieve more financial independence this year.
10 Smart Ways to Use Your Tax Refund in 2020
1. Establish an Emergency Fund
According to recent studies, over 60% of American’s couldn’t cover a $500 emergency expense . Needless to say, that’s a bit scary! An emergency fund is an integral part of any financial plan. You will always need an emergency fund, no matter if you’re getting out of debt or are already debt-free. An emergency fund will help you stay on track by creating a financial buffer between you and sudden, unexpected expenses. Life happens – cars break down, hot water heaters break, and people get sick. Having an emergency fund set aside for those potentialities could save the day. If you’re just starting out, saving $1000 is a great first step. If you’ve met that goal, considering beefing up your emergency fund with 3 – 6 months’ worth of expenses.
2. Pay off Debt
Paying off debt is the best way for most people to spend all or most of their tax refund. There are a lot of things that you can do with a bit of extra money, but few things will have as big of an impact on your financial future.
There are two basic ways to pay off your debt. First is the Debt Snowball. This method is extremely popular that relies on momentum from successful small wins. You start with paying down the smallest debts first and work your way up to the biggest, applying more and more money to each successive debt. The second method is the Debt Avalanche. Instead of tackling the smallest debt first, you take on the one with the highest interest. Getting those high-interest debts out of the way first will usually save you more money in the long run.
Whichever method you choose, the important thing is to start! Just get in there and pay off those car loans, student loans, and credit card bills that are preventing you from achieving financial freedom. They’re not going to go away unless you make them go away! If not now, when?
3. Invest in Your Side Hustle
Getting out debt and staying there involves cutting expenses. But it can achieve this goal faster by increasing your income. If a side hustle isn’t already part of your financial plan, then what are you waiting for?! Check our article Make Money Fast with these 10 Tricks.
But if you’re already involved in a side hustle, considering making an investment in your business. If you’re a crafter, you could use your tax refund to invest in supplies. If you’re a freelance writer, you might want to sink some money into a new website to promote your skills. Whatever your side hustle, there’s little doubt that a small cash infusion in your marketing or inventory would pay off in the long run.
4. Buy in Bulk
When we were first getting out of debt, we had a very small budget for weekly groceries without much wiggle room for “extras.” If we saw a crazy good deal on something we needed, we didn’t always have the extra money to invest in buying it which would ultimately save money in the long run.
Now that we’ve been out of debt for a few years and have more disposable income, we’ve learned to buy certain things in bulk to save money. Dry goods, toiletries, and most beauty products have a long shelf life. If you can catch a big sale and buy items in bulk, you may spend a bit of money upfront but will save money overall. And your extra stock may be a relief to have on hand if money gets a little tight later down the road. For more ways to save money on groceries and household items, check out How to Save Money on Groceries: the ULTIMATE Guide!
5. Further Your Career
Side hustles are great, and we recommend having one! But your current job, in most cases, is your best source of financial security and growth. Depending on your career or job, you may want to invest in an online class, like the ones on Udemy, Lynda, or The Great Courses to give you a leg up on the competition. There are loads of amazing courses online on everything from accounting to US History to Computer Programming.
There are, of course, other ways to enhance your career. One way is to consider joining a networking organization like your local Chamber of Commerce, Rotary Club, or BNI Group. Don’t hesitate to talk with your Human Resources department at your job to find out if there are any continued education rebates that they may offer as well!
6. Fund Retirement Goals
Retirement is a reality for most of us. At some point, you’ll no longer be employed due to inability or desire. Regardless of which situation you find yourself in, planning for your financial future is key.
For most people, your best self-funded retirement vehicle will be a Roth IRA. If you qualify to contribute to a Roth IRA, you can add up for $6000/year. All profit from your Roth IRA is tax-deferred until you begin withdrawing from the account. Upon withdrawal, you’ll pay taxes on the profits you received based upon the income tax bracket you fall in at that time. There’s hardly a smarter way to use your tax refund than saving for your future!
7. Save for a Down Payment
A house is one of the biggest purchases of your life! It’s so big that almost everyone has to apply for a mortgage to own one. Did you know that the word “mortgage” actually means “death contract”? Yikes!!! If you have a mortgage it really does feel like you’ll be paying on it your entire life. So, as you think about purchasing a home in the near future, consider using your tax refund as a contribution towards a down payment. The more you pay for your house out-of-pocket, the less you have to finance, the lower your monthly payments will be, and the sooner you will own your home free and clear!
8. Prepay Bills
This is a great option for anyone who’s income fluctuates drastically from month to month. For example, in sales, it can often be feast or famine. Rather than getting behind on your bills and incurring late charges, you may want to use your tax refund to prepay your expenses such as Internet service, garbage pickup, and insurance premiums.
In addition to weathering fluctuations in your income, you can also often save money on subscription services. Many subscription services give you a discount if you pay for an entire year upfront rather than on a monthly basis.
9. Make Home Improvements
Owning a home is a mixed bag. It’s nice knowing that you own or are working towards owning the roof over your head. But with that comes a lot of responsibility. Roofs need to be replaced, appliances die on you, and carpet wears out. If you’ve fully funded your emergency fund and are out of debt, then this is a great option.
There are loads of benefits to making home improvements. For example, appliances like dishwashers, refrigerators, and laundry machines become more energy effect over time. Replacing an old appliance with a new one could save you a little bit every month on your utility bill. Also, making the right home improvements adds equity to your home which could really pay off if you plan on selling in the future.
10. Increase Your Life Insurance
Life insurance is really an essential for any family. There are a lot of major events in life. But death often takes the greatest toll, both emotionally and financially. If you do not have a life insurance plan, this is a must-have investment for you and your loved ones that shouldn’t be put off any longer.
If you have life insurance but haven’t increased the face value of your policy recently, it may be time for a review. The reality is that, in most cases, we make more money and buy bigger houses over time which means there is more to protect. There are a lot of different methods for determining the right amount of life insurance to purchase. As a rule of thumb, we recommend a policy that covers 10x your annual earnings. If you feel like you need a professional option, contact a local life insurance agent in your area.
Getting a tax refund is like finding money you didn’t know you had. Proper planning will help ensure that you take full advantage of it and find the best way to apply it towards achieving financial freedom. Drop us a line and let us know how you plan to use your refund this year.