6 Ways to Spend Your Federal Tax Refund Wisely

Are you anticipating receiving a federal tax return this year? Most people who receive a federal tax refund, as additional money that they didn’t expect to have in addition to their monthly take-home pay. The average IRS federal tax refund in 2018 was $3,000. This is a huge chunk of extra money that people can use in several different ways. You might as well spend your tax refund wisely.

Even though running to the casino or taking a luxurious vacation seems tempting, there are plenty of good and bad ways to spend your tax refund. Even though most people who receive a federal tax refund as extra money, you should keep in mind that you worked hard to earn your refund. Try thinking of it as a rainy day savings account if you are lucky enough to receive a refund every year.

Tax season is just beginning and many people are already filing their taxes to see if they are due a federal tax return. The sooner you file your taxes, the sooner you could potentially reap the benefits. Once you know how much money you will be receiving, you can start planning on how to use your federal tax refund wisely.

6 Ways to Spend Your Federal Tax Refund Wisely

Do you already know how you are planning on spending your tax refund? If not, here are some ideas on how to spend your refund wisely.

Pay Off Debt

Do you have any outstanding debt that you could pay off and improve your financial status? Using your federal tax refund to pay off outstanding debt is a smart move. Paying off your debt early will drastically reduce the amount of money spent on interest. Plus, you could capitalize on the snowball method to pay off additional debt with the money that you freed up when you payed off a debt.

Dave Ramsey developed a useful strategy to help consumers pay off their debts and live a debt-free life. Using your tax refund can help make paying off your debt quicker and if you can wipe out a debt entirely, then you can use that payment to go towards paying off another debt. To use this method, you should list your debts from smallest to largest, including the interest rate.

If you are using your tax refund, you can pay off several smaller bills or tackle a larger bill that you can pay off entirely. For example, if you have a loan for $500 with 6%, Credit card debt of $4000 with 12%, car note, and mortgage. For example, if you are receiving a federal tax refund of $4398.00. We suggest using your tax refund to pay off the $4000 dollar debt. Let’s say that you are paying $100 a month on this credit card. Paying off this debt early will save you over $1900 in interest and cut your pay off off date by 70 months. Then take the $100 that you were paying on your credit card and apply it to your smallest debt and continue using the money to pay off all of your debt.

Save It

In the last two years, the cost of living has soared in our area. Has it in yours too? With costs skyrocketing and wages staying fairly stagnant, Americans are doing their best to stretch every penny as far as it can go. Over 35% of Americans have less than $1,000 stashed away in an emergency fund or savings account. Adding your tax refund to your emergency fund can help offset those unexpected costs such as medical expenses, car repairs, home repairs, or to have money to dip into in case you can’t make ends meet one month.

As a single parent, every year that I received a federal tax refund, I would store all of it in my savings account for emergencies. Having the money set aside allowed me to remain debt free and take care of those unexpected expenses that crept up over the year. Have you ever saved your tax refund for emergencies?

Make Home Improvements

Is your home in need of repairs? Instead of taking out a loan and accruing more debt, even if it is zero percent interest, it would be better to use any capital that you currently have including your federal tax refund. Just remember that you don’t have to do everything at once, you can make improvements to your home in stages as you have the cash to pay for it. Always, start with the items that need urgent attention and then focus on the other projects as your budget allows.

Make a Big Purchase That You Have Been Putting Off

Do you need a new couch, bed, washing machine, dryer, refrigerator, dining room table, braces, a new car, or any other major purchase that you would normally finance? We all know that certain items wear out or it will cost too much in repairs in order to fix it. Your tax refund could be used towards these purchases.

If you need a new car, the more money you can put down on a new or used car, the lower the payments will be. Just remember cars depreciate the moment you drive them off the lot. When both my adult children were ready to purchase a car, we suggested that they look at low-mileage used cars. Low mileage used cars are cheaper because the first owner took the hit when they purchased the car brand new. They put down as much money as they could to reduce their monthly payments and we even suggested that they make extra payments so that they could pay off their car note early.

Invest Your Federal Tax Refund

Stretch your federal tax refund even further by investing it. Whether you put your tax refund towards your retirement account, in the stock market, start a college fund for your kids, mutual funds, or conservative and diversified investments that don’t have a bunch of fees. Saving for your future is just as important as having an emergency fund set up especially since traditional retirements are a thing of the past.

Most companies only offer a 401K plan to help you save on retirement and no longer provide a pension to former employees. Some employers will match your contribution up to a certain amount, but for the most part, employees are on their own when it comes to planning for retirement. Remember the sooner you start a retirement account the better off you will be long term.

Most people are banking on drawing their retirement from Social Security, but even that fund may dry up and be a thing of the past if the government can’t find a way to keep it alive. Even if there is a social security benefit for you, it may not be enough for you to provide for all your monthly expenses and you may be force to work past the age that you are eligible to retire.

Start a Business

Use your federal tax refund to fulfill your dreams of starting your own business. Starting a business is a great way to invest in yourself, especially, if you are passionate about something. Today, starting a business online is so much easier than starting a brick and mortar business. Online businesses, generally, don’t require as much capital or have expensive overhead costs. Just keep in mind that if you do start a business that it can take some time to reap the benefits.

The average federal tax refund in 2018 was $3,000 dollars. What could you do with that extra money without spending it frivolously? It may be tempting to blow your entire tax refund at the casino, luxury vacation, or on things you don’t necessarily need. I’m not saying that you can take a small portion to your refund to purchase things that you need. But it also important to spend you tax refund wisely especially if you are guilty of living paycheck to paycheck.

6 Ways to Spend Your Federal Tax Refund Wisely (1)

How do you normally spend your federal tax refund? Do you spend your tax refund wisely?

8 thoughts on “6 Ways to Spend Your Federal Tax Refund Wisely”

  1. I don’t think i will be getting a refund but these are great ideas to use extra money that comes your way. I like to stay out of any debt so that would be my first choice for the money.

  2. We’re using ours to make a few improvements on our house before selling it in the next few months. I think now would be a good time to save with how uncertain these next few months are going to be for everyone.

  3. Just like what we do every year, we put our tax refund in an emergency fund. For other major purchases, we save up for that instead. It gives us peace of mind to know we have some money set aside for when we need it.


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