What to do with a Tax Refund

What’s the best part of tax season? Getting a refund!! It feels like free money hitting your bank account.

Now, you might be wondering what to do with a tax refund.

Should you go on vacation? Or put it in your savings account? Hint: likely neither!

When it comes to money - and all things, really - It’s important to think about the long-term. Having a clear vision of who you want to be, where you want to be, and what you want to do with your life will help you make strategic decisions today that will help you get there tomorrow.

But even though having a plan and achieving your goals is important, you also need to make sure you’re taking care of present-day you. After all, it’s important that you aren’t so focused on the future that you don’t pause to enjoy the special moments of everyday life.

For me, that’s the sound of the birds outside, the smell of the cacao I make in the mornings, or how fun it is to laugh with my husband. Without pausing to enjoy the present moment, none of that future stuff matters.

So, while we definitely want you to use your tax refund strategically, it’s also important to get a little enjoyment out of it too.

I’m going to be giving you a few ideas of things you can do with your tax refunds that will help take care of you both in the long and short term.

How to Use Your Tax Refund to Set Yourself Up for Financial Success

Okay, first let’s talk about the best ways to use your tax refund - then we’ll talk about how much to spend on pure enjoyment - so stay tuned!

1) Pay off high-interest rate debt

Did you expect me to say you should invest? I’ll get to that in a minute, but before you can start building wealth, you have to pay off your high-interest debt.

Learn the four steps you need to take BEFORE investing!

When I say high-interest rate debt, I mean debt with an interest rate above 7%. The reason it is so crucial to pay off specifically high-interest debt is because the average return on stocks is 7-8%. That means it’s impossible to get ahead financially when you’re paying off, say, a credit card with a 20% APR if you’re only making a 7% return on your investments.

So, if you have any high interest rate debt, use your tax refund to pay it off.

2) Bolster your emergency fund

An emergency fund is a financial safety net. It’s money you put aside for life’s unexpected events, like car or home repairs. It’s important to have one in place because you never know what’s going to happen in life and you need to be financially prepared.

Typically, we recommend an emergency fund be large enough to cover between six weeks to six months of expenses, depending on your situation and comfort level.

If you haven’t yet saved an emergency fund — or it’s not big enough to make you feel financially safe — use your tax refund to build this up.

How to Use Your Tax Refund to Take Care of Future You

Once you’ve completed those crucial steps to financial wellness, it’s time to think about ways you can invest your refund to get the optimal return or use it to lower your costs. Here’s what I suggest:

1) Invest in yourself

This could be a great time to take a class, buy an online course, or start pursuing a certification that could help you in your career. Making the choice to invest in professional development can lead to increased opportunities or salary down the road.

Take some time to think about where you want to be in the next 10-20 years. If you’re happy with your current career trajectory or if your company covers professional development for you, then you might want to use your money to invest in personal development.

Maybe this is a good time to hire a life coach or a personal trainer.

Or if you want to improve your finances, this could be a great opportunity to join the Million Dollar Year, where we’ve helped more than 6,000 women+ master their financial lives and grow their financial confidence.  

2) Invest in ETFs

ETFs are one of the safest ways to invest. They’re like stocks but with more diversification. They offer trading flexibility, portfolio diversification and risk management, lower costs, and tax benefits.

Like stocks, you’ll need a brokerage account to invest in these.

How to pick great ETFs!

3) Prepay your mortgage

There are two huge advantages to prepaying your mortgage: 1) you pay down your mortgage faster and 2) because you pay your mortgage faster, you pay less interest and therefore less overall.

So, if you have spare money, and you want to be debt free, you can use your tax refund to pay an extra payment towards your mortgage.

4) Make home improvements

This is something that can serve both present and future you.

Of course, you can always update your house just to make it more enjoyable. But if you’re considering refinancing or selling your house this could be a great time to make some strategic updates to your house to up the property valuation. A few things that can increase the value of your home:

• Refresh your paint
• Replace or fix worn carpet or flooring
• Update the kitchen and bathrooms. These rooms remain the gold standard for determining the value of your home.
• Create curb appeal. Updating flower beds and adding fresh mulch are easy, low-cost ways to make your home look a lot more appealing.

And if you just want to make your home feel a little more like a place to kick back and relax, then maybe you want to buy new furniture, create your dream reading nook, or try a fun Pinterest trend, like creating a cottagecore bathroom.

How to Use Your Tax Refund to Take Care of Present-Day You

Finally, make sure that you’re not so focused on preparing for your future needs that you skip over your current physical, mental, and spiritual needs. So, no matter what you choose to do with the bulk of your refund, it’s important to set some aside to keep life fun and exciting right now.

You can decide how much you want to spend based on your financial priorities, but I recommend setting aside between $100 to 10% of your refund to treat yourself right now.

What can you do with that money? Here are some options.

1) Treat yourself

Set aside some money to treat yourself. What is it that makes you feel great? Is it a massage or a pedicure? Going out to dinner? Going to a spa? For me, it’s going to the grocery store and buying whatever I want.

2) Try out new hobbies

Is there a hobby that you’ve always wanted to try? Maybe you’re curious about candle-making or you’ve always wanted to try watercoloring or go horse back riding. Use your new money to pay for a class and supplies to learn a new skill.

Or maybe you want to get back to a hobby you used to have but had to give up.

I loved this story from one of our Million Dollar Year members, Silvia. Silvia used to love to dance - but after she found herself in a tough financial position - post-divorce, with two kids, $58,000 in credit card debt and owing thousands in student loans - she thought she’d never be able to afford a dance class again. But after getting really clear on her goals and her priorities and saving for a few months, she took herself on a week-long dance staycation in New York City.

One of the reasons we value money at Dow Janes is because it helps you curate the life you want to live. Don’t be afraid to spend your money on things that will bring you joy and add true value to your life. What is it that you want to try? Use your tax refund to get started again.

3) Buy yourself something nice

I will admit that I have a sweater obsession. I can’t help but buy new sweaters, all the time.

What feels like a treat for you? Maybe you’ve had your eye on the new Jodi Picoult book or a summer dress. Feel free to buy yourself something new that you’ll enjoy. And congratulate yourself for getting your taxes done AND taking care of future you whenever you pick up your new item.

4) Give to charity

Finally - if you’re the type of person who benefits more from giving, then use a portion of your tax refund to make a donation. What’s a cause you care about? Homelessness, domestic violence, hunger? Choose an organization and donate a portion of your tax refund.

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