It’s the best possible scenario: you file your tax return and you get money back from the government. It’s an unexpected, exciting addition to your budget. Because it’s rare to receive a large sum of cash in one payment like this, it’s important to consider what to do with it.
While it’s tempting to spend the return on a new phone or outfit, or treat your friends to dinner or drinks, the smart financial decision for your tax return might be to save or invest it. While it’s less fun than a new gaming system, it has the potential to make life easier for you in the long-term — and possibly lighten your monthly financial expenses.
Here are a few ways to spend your tax return to get the most for your money.
Add it to your emergency fund.
Many financial experts say that you should have three to six months worth of expenses set aside in an emergency fund, ensuring that you can handle unemployment, injury, an unexpected move, or any of life’s many curveballs. If it’s been a challenge to establish an emergency fund, your tax return is a perfect way to get it started. Consider setting it aside in a high-yield savings account (see below) through a bank or credit union to ensure it makes you money while it sits and is also not easily accessible, to help avoid spending temptation.
Pay off debt.
Your tax return can double as a stress reliever if you apply it to your debt. It can help lower monthly payments, adding a little extra to your monthly budget. Making the biggest impact might result from putting the money toward your highest-interest credit cards or other debts to stop the fees from adding up. Bonus: you’ll likely have a little extra spending money each month.
Put it in a high-yield savings account.
Your tax return can work for you by adding it to a high-interest savings account. While the larger brick-and-mortar banks typically pay less than one percent interest for savings, many top online banks and credit unions pay between four and five percent interest. Those extra percentage points add up, increasing your savings with no extra work for you.
Invest in your retirement.
It’s never too early — or too late — to start thinking about your retirement. Consider putting your tax return into a 401k, a Roth IRA, a traditional IRA or other long-term, tax-free investment account. While you won’t be able to access it for many years without tax penalties, when it’s time to withdraw or tap that account, you should have more than your initial investment.
Invest in your home.
Homeowners, if there is a large repair or issue you’ve been putting off because of the high cost, your tax return could be the perfect opportunity to tackle that home improvement. Not only could an investment like a new appliance or a fixed leak or other persistent issue make life easier or more convenient on a daily basis, but it could potentially add value to your home, giving you an extra boost when you decide to sell.
Invest in yourself.
Receiving an unexpected payment is the perfect opportunity to invest in yourself — namely in your future. If you’ve been wanting to continue your education, use your return to enroll in classes. If you’ve been dreaming of starting a business or a side hustle, use your return to set up your website or Etsy store, or establish licensing and other business essentials. This bonus money can help fund some of the logistics so you can focus on building the business — and eventually making money.
In short, an unexpected tax return might be best used to build savings, pay off debt, or invest in your future. While it might not provide the rush of excitement that a new outfit or TV will, taking the smart, long-term approach will help alleviate budget-related stress and make life easier — and potentially more fun — for you down the road.
DISCLAIMER – The content is for informational purposes only and is not intended as advice of any kind. Enova, Pangea, and its affiliates do not provide investment, financial, legal, or tax advice. Consider consulting your own advisors before making any decision.
