5 Ways to Maximize Your Tax Refund

Getting your tax refund suddenly makes it worth all the hard work you had to put into filing your taxes. Staring at the numbers on that government check fills your head with ideas of how to spend it – a new smartphone, booking a vacation, or buying a new wardrobe. But are these purchases the wisest way to spend the funds? We all know the answer - probably not.

People tend to initially lead with their wants, rather than their needs, when they come into extra cash. According to a 2023 survey conducted by GoBankingRates, 10% of people said they will use their tax refunds to pay for a vacation, a major purchase, or for a splurge. While it may be tempting to join that ten percent, you should consider your options of using the money wisely, after all it’s not “free” or “extra cash” but money that you you’ve earned. Here are some smart ways to maximize your tax refund.

1. Heightening your home improvement. Giving your home a fresh look may feel like catering more to a “want” rather than a “need.” There is an actual financial benefit to investing money into your home. Increasing the curb appeal of your house will increase its potential value on the market. You may, or may not, be at a stage in your life where the time has come to sell your current home. Keeping your home updated with current appliances, efficient water/electricity, and a contemporary aesthetic, are all important for when you decide to sell your home – whether it be in the present or future.
2. Ditching your debt. This may seem like the most obvious answer on how to wisely spend your tax refund, but just because it’s obvious doesn’t mean it’s not a good idea. Putting your extra cash into any outstanding debt you have such as: credit cards, student loans, auto loans, and mortgage loans, are all acceptable places utilize your tax refund. Even if you have the funds to make your payment, use the additional money to make a payment on the principle. This will save you money in the long run by reducing the overall interest you would have to pay.
3. Paying it forward with investments. If you are looking to gain interest, investing a portion of the funds into the stock market is a good option to consider. However, in doing this you should understand that this doesn’t mean making risky purchases on single stocks – rather you should invest in mutual funds which is a much more stable source of investment. Plan to leave your funds there for an extended period of time to allow it build more value with the ebb and flow of the stock market, this should not be a financial plan where you can expect to “get rich quick.”
4. Stocking it away in savings. Building your emergency savings is an admiral use for your tax refund. GoBankingRates cited that more than 40% of respondents plan to use their tax refund to build their savings account. In looking towards building your emergency savings, you should typically have between 3-6 months’ worth of your pay check saved in order to cover your living expenses should disaster strike. You may already have your emergency savings built, but putting more money in to cushion any “just-in-case” scenario is always a good idea. In your savings account the money won’t gain a lot of interest, but it won’t be deducted either. Your savings account is a neutral place to store funds until they are needed for some other expense.
5. Mixed basket. Finding use for your tax refund doesn’t have to be a “one and done deal”, any of the options above are useful and smart ways to use your tax return. Maybe you use 50% for your emergency savings, 40% for paying off debt, and 10% for investments. It all depends on your specific situation, and how the money will work best for you.

There are many options available to use your tax refund responsibly. Don’t waste your hard earned money on useless splurge items. Pay your tax return forward this year.