Although it can be tempting to think of your refund as ‘free money’ (and therefore an opportunity to treat yourself), your tax refund is actually money that you worked hard to earn. Uncle Sam has simply been borrowing it for the past few months–but it’s your income.
In 2019, the average tax refund issued by the IRS was $2,869. That’s a good chunk of change, that you could put towards your emergency savings, credit card debt, student loans, or car loan!
That’s why we think it’s time to rethink your tax refund: Before you head off into a shopping spree, it’s worth it to take a step back and consider using your tax refund toward your other financial goals.
Like with most things in life, when it comes to your tax refund, preparation is key. Before you even file your taxes, create a plan for what to do with your tax refund. The IRS even lets you determine which accounts (up to three accounts) you’d like to split your tax refund into: So once you decide how to use your refund, you can set it up to deposit automatically and get to work!
1. Set up an account buffer
An account buffer is much smaller than an emergency savings fund, and serves a different purpose. Emergency savings are typically thought of as having anywhere from three to nine months of living expenses on hand in the event of a major catastrophe. If you change jobs, get hit with expensive medical bills, or a natural disaster comes your way, you can find immediate relief in your emergency fund.
Think of an account buffer as a baby step toward an emergency fund: about two weeks of income used to cover smaller financial burdens, like overdraft fees, higher-than-usual expenses, or bounced payments. If you’re not sure what to do with your tax refund, use your tax refund to create an account buffer. You’ll not only be saving yourself financial heartache, but you also won’t have to save up over time in order to create it—you’ll have it now!
2. Send it to your emergency fund
For all the reasons listed above, if you don’t have any emergency savings, or if your emergency fund isn’t fully funded yet, we’d recommend committing to saving your tax refund in your emergency fund. Check out our Ultimate Emergency Fund Guide for more info!
3. Pay off your high-interest debt
If you are carrying a credit card balance, consider using your tax refund to pay that off. You might feel more excited about saving the money, but hear us out: If you’re accruing the average 19.02% APR on your $3,000 credit card balance, you’re better off paying that off first. Once you’re free of that high-interest debt, then you can start saving money more aggressively.
4. Pay off your student loan debt
If you’re one of 44 million Americans carrying a total of over $1.5 Trillion in student loan debt, you might want to use your tax refund to get ahead on your monthly payments. Although student loans typically bear lower interest rates than credit card debts, you’re still spending money on interest that you could be putting into your pocket. The sooner you can achieve that debt-free status, the sooner you’ll be able to start saving more aggressively!
5. Fund your Savings Goals!
If your emergency fund is funded, and you’re debt-free or on your way to be, you might want to put your tax refund towards some short- or long-term savings goals. Do you want to put a down payment on a house in the future? Do you want to get married, or go on a trip with your partner? Do you plan on having kids? Set up Savings Goals for those dreams in the Simple app, and use your tax refund to make them reality that much sooner!
6. Use it to pad your monthly Expenses
Another not-so-glamorous, but smart way to use your tax refund? Use it to pad your monthly expenses. While your current income might allow you to cover your bills month-to-month, it can be helpful to have some extra cash to use as a buffer in case your paycheck is delayed or your expenses are higher than usual.
If you’re using Simple Expenses to track your monthly bills, you can transfer the extra cash to one or more of your upcoming Expenses to keep it separate from your Safe-to-Spend.
7. Buy a CD
If you want a concrete, simple way to earn some interest on your money, consider buying a certificate of deposit (CD). A certificate of deposit is a sum of money you keep in a bank or credit union for a set period. That sum then generates interest. In short: give the bank some money for a while and you come out with more than your initial deposit at the end.
Image description: A blue bar graph showing the difference between savings account and CD rates. The left bar displays an average savings account yield of 0.09% APY. The right bar shows an average 12-month CD yield of 0.48% APY.
Rates are based on national industry averages pulled from this link here, are based upon the February 3, 2020 rates, and are for illustrative purposes only.
8. Save it for retirement
Although retirement might feel far away, it pays to start saving for it as early as you can. That’s because of a little thing called compounding interest. Basically, the sooner you start saving for retirement, the sooner you can start earning interest on your balance. The more you save, the more you’ll earn–and the sooner you start saving, the more you’ll earn over time!
Whether in an employer-sponsored 401k, a traditional or Roth IRA, or simply a high-yield account, putting your tax refund toward your retirement is a smart money move!
9. Start a side hustle!
Have you been itching to turn your passion into a side hustle? Side hustles can be a great way to flex your creative muscle and earn more cash, but they sometimes require some up-front investment:
- If you want to start driving for a ridesharing company like Lyft or Uber, for example, you might want to get your car professionally detailed and invest in some supplies to offer a stand-out experience, like extra phone chargers.
- Starting a dog walking business might require some business cards, dog treats, poop bags, a website, and a new pair of sneakers.
If you’re serious about getting your side hustle off the ground, decide to commit your tax refund towards your new business, and make a plan for how you’ll use the money. Within time, you’ll hopefully recoup your initial investment, and start earning extra cash to put toward your financial goals. Go you!
Make a plan!
Hopefully after reading this, you have a better idea of what to do with your tax refund. While it’s tempting to spend your entire tax refund on something fun, remember that you worked hard for that money! If you want to treat yourself, treat yourself with a percent of your refund. But treat the rest it just like you would the rest of your paychecks–and use it to prepare for a better financial future. Your future self will thank you!
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Disclaimer: Hey! Welcome to our disclaimer. Here’s what you need to know to safely consume this blog post: Any outbound links in this post will take you away from Simple.com, to external sites in the wilds of the internet; neither Simple nor our partner bank, BBVA Compass, endorse any linked-to websites; and we didn’t pay/barter with/bribe anyone to appear in this post. And as much as we wish we could control the cost of things, any prices in this article are just estimates. Actual prices are up to retailers, manufacturers, and other people who’ve been granted magical powers over digits and dollar signs.