What to Do with Your Tax Return Money

Person sitting over 2019 tax return paperwork

Spring has undeniably sprung, and we can poke our heads out and feel the sun. And with spring comes everyone’s favorite American holiday…Tax Day and the dread of tax returns.

I know, I know. It’s decidedly not fun to get all of your papers together, wrangle an automated program, or fork over an accountant’s fee. 

But for many of us, Tax Day comes with a benefit that makes all the busywork worth it: A refund.

Once you’ve got your tax return money in hand, what’s your next step? I’ve outlined six ideas of ways to spend your tax refund — including treating yourself to something special.


1. Start or pad your emergency fund.

If you don’t have an emergency fund, let me tell you right now: You’re not alone. According to a Bankrate survey, less than half of Americans (43%) are set up to cover a $1,000 emergency with their savings. And it’s a vicious cycle: Without emergency savings, people are much more likely to take on debt. 

But emergencies happen, and everything from a medical crisis to car trouble can seriously upend someone’s financial picture. Putting even a few hundred dollars into an account is a great start — anything helps.

Keep a few things in mind to get the most out of your emergency fund. First, you want your emergency fund to be liquid, meaning you don’t want it tied up in investments. If your roof leaks and you need it fixed tonight, you need to be able to access that money immediately, so stick to a savings account that you can quickly transfer to checking. You also might want to consider a high-interest savings account, meaning your money will grow over time without you touching it. (It will grow more slowly than an investment account, but you’ll have access to your money whenever you need it.)


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2. Invest in your retirement.

It doesn’t sound exhilarating, but I’m here to tell you that retirement accounts can be super compelling. Here’s one key reason: Depending on the type of account you choose, you might be able to lower next year’s tax bill — and get an even bigger refund.

If seeding your retirement fund sounds like a boring way to spend what feels like surprise, fun money, here’s a fun trick I learned in my twenties when retirement seemed a hundred years away: Plan the most fun parts of your retirement. Here’s an example: Say you dream of a once-in-a-lifetime trip to Italy in your golden years. So, research the over-the-top hotel you’ll stay in. Do 15 minutes of Duolingo or another free language app before bed to immerse yourself in your destination’s culture. Spend as much time as you can thinking about what that fund will pay for, and picture yourself living it up without taking vacation days.


3. Pay down some high-interest debt.

If you’re trying to chip away at your debt, consider paying down your highest-interest debt first. Ideally, you’ll be able to lower your monthly payment minimums, so you’ll continue feeling the benefits after you hand over your refund to the credit card companies. Debt is stressful, so consider lowering your monthly commitment as a gift to yourself.

I’ve had financial advisors suggest one debt you shouldn’t pay down early — a low-interest mortgage. If your only debt is a mortgage and you can make those payments, you’re much better off investing that refund. Speaking of which…


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4. Invest that refund and watch it grow.

Where to invest your refund? Consider an easy app like Betterment which invests your money for you. You can decide the amount of risk you want to take on and set a goal, like $30,000 in your account by your 50th birthday. An investment like this is a set-it-and-forget-it type of deal — your money will grow over time.

A general note about investing: Remember that the market goes up and down, and that’s normal. Investing is about long-term growth; if you check your balance every day, you’ll give yourself unnecessary anxiety. The key to investing is to ride the waves and think about the long term — a downward dip isn’t a freefall. It always bounces back.


5. Spend a little on yourself.

The options I’ve outlined above are all responsible, measured paths to fill out your financial picture. But I want to be clear: Save a little for fun. So much of what I’ve read about tax return money cautions against fun spending. Still, in my experience, a life of total restriction without indulgence leads to less-than-helpful money-making decisions. Humans need fun, and there’s no reason why you can’t make a mature choice for your finances and treat yourself. A manicure, drinks at a new restaurant in town, or a new set of running shoes are all little ways to splurge on yourself. You made it through another Tax Day — you deserve it.