While tax season fills most people with dread, there’s one thing everyone looks forward to — tax refunds. According to the IRS, approximately 71% of American tax filers receive a tax refund. In 2019, the average tax refund was a whopping $2,869. If you’re like many people, that may be the biggest lump sum you’ll see all year – so it’s important to use it wisely.
7 Best things to spend your tax refund on
During tax season, retailers compete for your business. You’re bombarded with advertisements and sales trying to get you to spend your newfound money. But before parting with your hard-earned funds – it is money you worked for, after all – focus on using your tax refund on things that will improve your finances, your future financial prospects, and overall well-being.
Need inspiration? Here are seven smart ways to use your tax refund.
1. Student loan lump sum payments
Student loan debt can be a substantial burden, causing you to put off other goals like saving for retirement, relocating to a new city, buying a home, or even getting married.
Using your tax refund to make a lump sum payment on your debt could allow you to save money on interest fees and help you pay off your loans ahead of schedule.
For example, let’s say you had $30,000 in student loan debt at 6% APR. With a minimum monthly payment, it would take you 10 years to repay your loans. And, you’d repay a total of $39,970; interest charges would cost you $9,970.
But let’s say you received $2,869 as a tax refund. If you applied the entire amount to your student loans as a lump sum payment, you’d pay off your loans 15 months early and you would repay just $37,801. By using your tax refund to make an extra payment on your debt, you would save $2,169 in interest charges.
You can make your tax refund work even harder for you by refinancing your student loans to possibly lower your interest rate. Use our Student Loan Refinance Calculator to see what you could save by refinancing your student loans.*
2. Medical procedures
If you’re like many people, you may have put off going to the doctor or visiting a dentist because you simply couldn’t afford it. In fact, 25% of Americans reported putting off necessary medical procedures due to cost. However, skipping routine medical and dental care can cause more expensive issues later on, so it’s important to stick to a preventative care routine.
If you haven’t been to the doctor or dentist because you were short on cash, using your tax refund to take care of your health is a wise investment.
3. Car repairs
Cars are often money pits, causing many people to skimp on routine repairs because of the expense. AAA reported that the average car repair is $500 to $600, but can often cost much more. Keeping up with your car’s maintenance and making necessary repairs can improve your car’s lifespan and fuel efficiency, helping you avoid more costly issues later on.
If you’ve been putting off any repairs or need to replace your tires, use your tax refund to finance that purchase so you can get to and from work safely.
4. Professional development
With technology changing so quickly, it’s essential that you keep on top of the latest trends in your field so that you remain competitive in the job market. If you want to take your career to the next level, consider using your tax refund to invest in your professional development. You can attend a conference, take a class, or hire a career coach.
5. Investments
If your finances are in otherwise good shape – meaning you don’t have high-interest debt or a pressing immediate expense – you can use your tax refund to build long-term wealth. Consider using your refund to invest your money by making contributions to your retirement accounts or an individual taxable account.
Don’t think your tax refund can make that much of a difference? Think again. Over time, your money can grow significantly.
For example, let’s say you’re 30 years old and deposit your $2,869 into an individual taxable account. If you don’t deposit another cent and your money earns an average annual return of 8%, that account will have grown to $31,374 by the time you’re 60.
If you’re not sure where to start, check out robo advisors like Betterment® or WealthFront®. They automatically invest your money based on your goals and risk tolerance, so you don’t have to be an investment expert to reap the rewards.
6. Exercise equipment
Investing in your health and wellness is a good use for your money. Over time, it can help you save on health insurance and medical bills, too.
Consider using some or all of your tax refund to purchase exercise equipment you’ll actually use. Or, sign up for a gym membership or take a few sessions with a personal trainer to ensure you’re using the equipment correctly.
7. A new computer
If you freelance or are thinking of starting a new side hustle, you may want to use your tax refund to purchase a new computer or software so that you can work more efficiently. With better tools, you may be able to improve your earning potential. And, you may be able to deduct the cost of a new computer or software on next year’s taxes (talk to a tax professional about your unique situation).
How not to spend your refund
There are a lot of bad ways to spend a tax refund. But one of the worst is using it to purchase a car you can’t really afford. Unfortunately, using a tax refund to buy a new car is incredibly common.
Using your tax refund as a down payment can help you qualify for a car loan. But car values depreciate rapidly, and you could end up with a car that is too costly for your budget, or you could end up owing more than the car is worth. That issue can put you in a precarious financial position, and it’s hard to dig yourself out of debt.
If you need reliable transportation, use your tax refund to purchase an inexpensive, used car that you can comfortably afford. If you need to take out a loan, financial experts recommend that you choose a loan term no longer than 36 months; if you need a longer loan term than that to manage the loan payments, the car is likely more than you can truly afford.
There’s seven things that you should spend your tax refund on, along with one that you shouldn’t! Regardless of your situation, focus on spending your refund responsibly.
For more information, learn how to create a monthly budget.
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