How to Spend Your Tax Refund
Discover the best ways to spend your tax refund, whether improving your home, paying down debt or advancing your career
While you probably don't look forward to filing your taxes on April 15, you may get excited about receiving and spending your tax refund. Many people use this cash to buy clothes, gadgets and other fun things; however, some of the best ways to spend a tax refund could help you save money in the long run. If you need some strategies for spending your tax refund wisely, check out our list of ideas to help maximize your money. If you want to use your tax refund for a specific purpose, consider using the money to open a checking or savings account at Citizens Bank and set up automatic money transfers to help you reach your financial goals.
It's your money: spending a tax refund wisely
Most taxpayers look at their refund as 'free money' from the government, but it may pay to alter your perspective. Because a tax refund is the amount of taxes you overpaid during the year, the government is actually paying you back, rather than giving you a gift. As you determine the best method for spending a tax refund, it's important to make sure you examine your financial situation and long-term goals. While it may be tempting to treat it like a bonus check and use it to buy yourself something special, it can be more beneficial to use the funds in other ways. How would you have used the funds throughout the year if you didn't have to pay taxes? Would the money have gone toward covering bills, saving for retirement or replacing an appliance? Examine your budget and look for areas where you had to cut back to determine where your refund will be best spent.
It's also important to remember that your refund amount will likely vary from year to year depending on changes in income, marital status, the size of your family and so on. You may not even receive a refund some years. So, before you make plans for spending your tax refund, be sure to have your taxes prepared by a certified tax preparer or accountant. These individuals will be able to tell you if you are eligible for a tax refund and give you an estimate of how much you may receive.
Start or maintain an emergency fund
You may not know it yet, but your tax refund could help you out of a financial jam weeks, months or even years after you receive it. That's because one of the best ways to spend a tax refund is by using it to establish an emergency fund for unexpected expenses. One option is to have it deposited directly into a checking or savings account designated exclusively for unanticipated events like emergency car repairs, medical expenses or job loss. After you deposit the initial amount, you can set up automatic money transfers to add to the fund regularly. Don't be discouraged if you don't have much to set aside - even small amounts add up over time.
Contribute to an individual retirement account (IRA)
Use your tax refund to help prepare for retirement by using the funds to open or contribute to an IRA account. This will not only help you save for the future, but it can also contribute to the size of your refund next year since IRA contributions are tax deferred. If you're not quite ready to open an IRA, you could put the funds into our retirement savings plan until you have enough saved for an IRA CD.
Pay down debt
It's not as fun as buying something new, but paying down debt is one of the best ways to spend a tax refund. If you have high-interest debt from credit cards, consider using part or all of your tax refund to pay it down or pay it off completely. This will reduce your interest payments and could help boost your credit score.
If you are not carrying any credit card debt month to month, think about spending your tax refund on an extra payment toward your mortgage, student loans or auto loan. Even one extra payment reduces the life of these long-term loans, which means you will pay less interest and save more money over time. If you have several outstanding loans and aren't sure which to put the most money toward, a certified financial advisor can help.
Complete home improvements and repairs
Spending your tax refund on home improvements doesn't necessarily mean renovating a kitchen or adding on to your home - though you could! Here are a number of small but significant ways you can use this cash to improve your house:
- Add a new coat of paint.
- Repave your driveway.
- Replace outdated faucets.
- Buy landscaping materials like mulch, new tools or new plants.
- Update lighting or faucet fixtures.
- Replace older appliances with upgraded, more efficient models to save on energy and repair costs.
Take care of yourself - or the community
While it's important to build an emergency fund and pay down debt, it's also important to invest in yourself. Spending your tax refund on medical expenses like orthodontia, laser eye surgery and more is not only a smart use of funds, but it can also keep problems from getting worse and costing more later. Perhaps it could be used to cover an annual gym membership to help you stick to your New Year's resolution. Maybe your refund is a little smaller this year but is just right to spend on a relaxing spa day. Or, maybe you could use your tax refund to pay for continuing education classes to advance in your career.
If you don't have an immediate need right now, you may feel the best way to spend your tax refund is to donate the sum to a worthy cause. Giving money to charity not only contributes to a great cause, but can also be claimed as a deduction on next year's tax return. IRS rules about deductions and charitable giving can change, so be sure to speak with a certified tax expert about how charitable donations could affect your tax return and if you're eligible for deductions for charitable contributions.
Start a vacation or holiday fund
Instead of using credit cards to pay for trips or gifts, use the money from your tax refund to open a goal-oriented checking account. Then set up money transfers to add to the fund a little each month until you reach your goal. Then, you can use this account to pay for trips, holiday shopping or other spending. One Deposit Checking from Citizens Bank® is a great way to get started - especially since making just one deposit into the account each month waives the monthly maintenance fee.
Learn how to switch banks and put your tax refund to work at Citizens Bank
When the time comes to spend your tax refund, take a moment to decide what option is right for you. Whether you're paying down debt, sprucing up your home or preparing for a vacation, Citizens Bank will be there with checking and savings options that will help you reach your goals. If you have questions about how to switch banks, open a new account or set up money transfers, contact a Citizens Bank customer service representative today.