The 5 BEST ways to use your Income Tax Refund

Published on February 10, 2017 by Lauren

Tax season is here which means that you may get an Income Tax Refund! If you’re one of the 100.3 million Americans that received a tax refund in 2015, you probably expect to get that extra bit this year as well.

income tax refund

This is exciting! Who doesn’t love extra cash?

The average tax refund in 2015 was a little over $3,000, with the total tax refund payouts in 2015 equalling $271 billion [source].

Wow! Think about that! That means that between Mid-January and Mid-April this year, we can expect over $270 billion in extra money flooding into American’s homes. What are you going to do with that extra money?

Let’s put this in perspective a little – the total US Credit Card debt is around $750 billion. So, in a perfect world, if everyone just put their tax refund towards paying off their credit cards, it would take less than 3 years to pay off all US credit card debt. All of it.

But with each passing year, that debt number increases despite this annual injection of money each year.

This year, let’s change that. Let’s do something better with our tax returns than buying a bigger TV.

The 5 BEST ways to use your Income Tax Refund:

1. Start your Emergency Fund

I’ve heard people refer to tax refund season as “Poor Man’s Christmas.” While it can feel like that, I want you to start thinking of your tax return as a tool to invest in your future and not a 2nd Christmas.

Square one for any budget is setting up an emergency fund. In my opinion, this is even more important than paying off your debt because having a fully funded emergency fund is a safeguard that will keep you from using your Credit cards in the future.

There are a lot of ways to get an emergency fund (see how to in my post here), but you can fast-track the whole process with your tax refund. One huge trick to making an emergency fund work is to keep it completely separate from your other money. Keep it out of your checking account so you don’t accidentally spend it. And I actually recommend keeping it separate from your normal savings account.

One other thing with your emergency fund – since you’re going to use the money in an emergency, that usually means you need the money FAST. You need access to that money ASAP.

2. Consolidate and/or Pay off your Debt

Getting free from debt is a building block to planning a brighter future. It’s unfortunate that so many Americans graduate from college with more than a degree, they get the added bonus of being saddled with debt. We can all do the math. Between school loans and credit cards, many of us look back and realize we’re in a pickle.

Don’t get crushed by it. It was never the plan for your life to be crushed under debt. Start taking steps to push back! Use that tax return as a little push to get you started. I would start your debt payoff with your lowest balance first and work from there up to the higher balances. This will reduce the number of cards you have to keep track of and encourage you to keep going.

But I’ve got something REALLY awesome… I’ve got an amazing tool that will give you your own personalized debt payoff plan! You just plug in your balances, interest rates, what day you’d like to be debt free, etc., and it does all the work for you! Click HERE if you’re interested.

Get access to debt payoff plan

But honestly, trying debt consolidation may give you the best of both worlds. You can simplify your payments, your APR’s, and focus your tax refund in one place. Credible and SoFi are two of my favorite Student Loan Debt consolidation options. If you’ve never considered consolidating your student loans, it may be a massive help.

To consolidate your credit cards I recommend Marcus.com. It has excellent options for credit card debt and personal loans that could be a great solution to your specific situation. A lower APR and more payment flexibility are something worth considering. You could be out of debt faster than you thought!

I also have a free budgeting pack and spreadsheet for you to help!  Sign up below and get it immediately sent to your inbox.

income tax refund

3. Save for a Vacation

Mark and I just got back from an amazing vacation in Montego Bay Jamaica! Being at an all-inclusive resort in the Caribbean was magical! But, honestly, what’s even more amazing is that we paid for the trip with money we saved! When we got home, the only thing waiting for us was our kids… NOT a credit card payment.

income tax refund

If you want to go on a vacation, save up for it! Your tax refund can give you a little head start that will motivate you to keep saving for it.

I know you work hard. I have no doubt that you deserve a vacation. But, I’d like to suggest that for the sake of your budget, maybe deserving a vacation isn’t enough of a reason to just take one and pay for it later (with interest).

Earn your vacation by intentionally saving up for it and paying for it with cash! And once you’re standing on that sandy Caribbean beach, or looking up at that Disney Castle, you can take a deep breath and say, in all honesty, “I’ve earned this.

4. Start Saving for your Next Car

Cars don’t last forever. They will break sometimes. That means someday you’ll need a new one… I mean new to you, NOT brand new off the lot. If you know that someday you’ll need to replace your car, it might be a good idea to start planning now. Right?

What if you didn’t have to make payments on your next car and you just bought it outright? We bought a new (to us) minivan with cash last year. Not having any car payments in our budget freed us up to save for and focus on other things! It was so worth it to not have that extra debt!

5. Start thinking about retirement with a Roth IRA

If the thought of investments confuses or overwhelms you, that’s ok. If the thought of saving for retirement just discourages you, don’t worry. Roth IRA’s are a simple, but amazing way to help set you up for retirement! And when you use your tax refund to help, it will be pretty painless.

Here are a few of the main points that make Roth IRA’s so great:

  1. They have a good interest rate so you can see growth on your investment.
  2. It is Tax-Free!
  3. You might have to pay a penalty if you pull it out before retirement age. This is a good thing! It encourages you to leave that money for your later years when you’ll really need it.

Betterment has a great tool to help you invest in a Roth IRA and start planning for your future.

In closing, there is a verse in the bible that talks about how ‘seed is for the sower, and bread is for the eater’.

In this context, start to think of your tax return as seed. If you eat seed, it won’t fill you for very long, and in the long run, you’ll have less than you expected. But if you take this same seed and sow it into your future, you’ll get to watch it multiply and grow, and start to work for you!

 

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