8 Ways to Use Your Tax Refund Wisely

For most people, tax season is anxiety-inducing. Not only is there a lot of paperwork to complete, but the stakes are high when it comes to getting your numbers right. But, even if filing taxes isn’t fun, receiving a tax refund of hundreds (or even thousands) of dollars can be exciting.

When you receive a refund, it can be tempting to blow that money on anything that strikes your fancy. But what if you were able to use that refund to further your financial goals? In that case, you may want to think about the best ways to use your refund wisely, for your personal goals.

How Do I Use My Tax Refund Wisely?

Of course, this isn’t to say that you can’t use any of your tax refund on a splurge—you deserve to treat yourself! So to be intentional with your tax refund, you might consider allocating 80% of your refund toward your financial goals and 20% toward things that bring you joy.

So first, be sure to reward yourself by using a small portion of your refund to do something fun. Perhaps that’s funding a vacation with your family, upgrading your basement with a home gym system, or even buying those Taylor Swift tickets you’ve been eyeing—whatever it might be that’ll add a little magic to your life.

But as for that 80%, what are the best ways to pursue your financial goals? Below, we explore 8 ways you can use your tax refund to support your financial well-being.

Pay off your debt
Boost your emergency fund
Fund your retirement account
Jumpstart your children’s education fund
Save for big upcoming expenses
Start or grow a business
Donate to a cause you believe in
Hire a financial coach to help you create a plan for your finances

1. Pay Off Your Debt

A perfect place to start is to pay off your debt—no matter how uncomfortable it may be. While most people would rather focus on watching their savings grow than on settling their debt balance, paying off debt can have a major impact on your financial wellbeing.

If you have multiple debt balances to pay off and your tax refund won’t wipe out all of them, you have a few options in front of you. Option one is to use the debt snowball method, which means you use your tax refund to pay off the smallest balances first. Wiping out multiple small balances is psychologically rewarding because now you have fewer payments to make!

Another option is the debt avalanche method. With this method, you attack the balances with the highest interest first, no matter the size of the balance. This is because high-interest debt is the most expensive debt, so you’ll actually save more in the long run if you use the debt avalanche method.

To determine which method is best for you, consider what’s most important to you. Will you feel more motivated by having fewer payments, or will you feel more motivated by attacking the more expensive debt first?

2. Boost Your Emergency Fund

Let’s face it, life happens. It’s possible that in the next year, you might experience:

Your car breaking down
An unexpected medical expense
An outdated computer that needs an upgrade

None of these scenarios are particularly fun. And if you haven’t saved up for them in advance, you may find yourself falling further into debt or sacrificing other financial goals.

Therefore, a second consideration is to use your tax refund to boost your emergency fund. Many experts agree that you should have about 3 to 6 months' worth of expenses saved in case of an emergency, although the exact amount you save will depend on your situation.

3. Fund Your Retirement Account

If your debt is paid off and your emergency fund is flush, you might consider putting your tax refund toward your retirement savings. Whether your goal is to retire early or take the more traditional path and retire in your 60s or 70s, your tax refund can give you a leg up in reaching your retirement goals.

As a small business owner, you’ll want to check the contribution limits for your specific retirement plan. If you have a solo 401(k), you may be able to contribute a total of $66,000 in 2023 as both the employee and employer of your business—although your actual contribution limit depends on how much you earned that year.

4. Jumpstart Your Children’s Education Fund

Another option is to jumpstart your children’s college education fund. If you live in a state where you pay income tax, contributing to a 529 plan may help to reduce your taxable income. Other options include Coverdell Education Savings Accounts, UTMA/UGMA accounts, and more

While contributing to your children’s education fund is certainly a good use of your tax refund, I do have one piece of advice to offer. If it’s a choice between whether you should boost your retirement savings or your kids’ college savings, I generally recommend prioritizing your own retirement. After all, you can finance a college education. You can’t finance your retirement.

5. Save for Big Upcoming Expenses

If you have a known big expense coming up, this is a perfect way to maximize your tax refund. Setting that money aside in a savings account (preferably a high-yield savings account that pays you interest) can ease that future purchase and prevent you from going into debt.

Some big expenses you might consider are a new car (make sure to set your budget now!), a big home improvement, or even a down payment for your next home. Using your tax refund to start or supplement these savings goals can give you a major head start.

6. Start or Grow a Business

One of the biggest financial investments you can make is investing in yourself. Starting or growing a business is one of the best ways to do that. You can use your tax refund to finally start the business you’ve been dreaming of—or provide a cash injection for your current company.

7. Donate to a Cause You Believe In

If you’re meeting your financial goals or simply feel called to give back, you might consider using your tax refund to donate to a cause you believe in. And if you find yourself drawn to multiple causes, consider allocating portions of your refund in different ways. For example, perhaps you give 50% of your refund to local charities and 50% to national or even international organizations.

However you decide to donate your tax refund, you can make sure you’re giving to reputable organizations by researching them on sites like Charity Navigator or Charity Watch. These sites can help you discover exactly how your donation will be used and reveal any nonprofit abuses or conflicts of interest.

8. Invest in A Financial Coach

One of the best investments you can make for yourself is working with a financial coach— a great consideration if you want to build an empowering relationship with a professional who can help you optimize your personal and business finances.

A financial coach helps individuals and small business owners:

Learn money management skills so paying yourself doesn’t feel like being stuck in a maze
Eliminate debt so you can have more freedom over your financial and emotional well-being.
Create cash flow systems to maximize profits so you can build generational wealth for your family.

The best thing about working with a financial coach is having the guidance—and the education—you need to make financial decisions that truly move the needle.

Maximize Your Tax Refund With Financial Fitness Coaching

At Financial Fitness Coaching, we love helping entrepreneurs, small business owners and driven professionals feel confident during tax season and make the most out of their tax refund to reach their financial goals. To see how we can offer you guidance so you can maximize your money during tax season and beyond, email us at info@financialfitnesscoaching or simply schedule a free 20-minute Discovery Call on our calendar.