4 empowering ways to spend your tax return


Your tax return can do a lot for your money and mindset.

It’s tax season again, which means many of us will be getting a refund. In 2019, the average refund was $2,725Disclosure 1 and a survey showed that 65% of respondents planned to spend their tax return on something other than savings or paying down debt.Disclosure 2 This year, how can you use your tax refund in more empowering ways that improve your well-being and get you closer to your long-term goals?

“Where people usually go wrong,” says Brian Ford, head of financial wellness at Truist, “is spending their refund before it arrives.” For example, they make a big purchase with a credit card or take a tax refund advance loan, which often come with costly interest and penalties. But spending money you don’t actually have yet can lead to big regrets, especially if an unexpected expense arises.

Instead, Ford suggests not using any of your anticipated refund until you actually receive it. Then, use the majority to do something beneficial for your well-being—like establishing an emergency fund, paying down debt, or investing for retirement. 

For the remaining 20 – 30% of your tax return, Ford says, “spend it according to your values.” Aligning purchases or setting aside money for the things you care most about—such as travel, experiences with friends, or a home for your family—can have a positive impact on your confidence and overall life satisfaction. (More on this in point #4 below.) 

1. Shore up emergency savings

In a survey, 36% of millennials said they didn’t have any money set aside for an emergency or unexpected expense.Disclosure 3 Take a lesson from 2020 and begin saving for the unexpected. If you have little or no emergency savings, start with a goal to save $1,000 in a separate account that you only touch for emergencies—that’s less than half the average refund from last year. After that, work to grow the fund to hold 3 – 6 months’ worth of living expenses.

If 2020 depleted your emergency savings—or you need a jump-start—your tax return is a great way to pad your savings for the future. It’s hard to put a price on peace of mind, but having a substantial emergency fund can do wonders for your mental well-being.

2. Reduce your debt load

Only 22% of millennials are debt-free.Disclosure 4 If that’s you, bravo! Skip to the next idea. But if, like most Americans, you’re carrying some form of debt, your tax return could help make a dent in the balance. If you have debts under $1,000, using your return to pay one or more off could free up monthly cash flow and help you move on toward other goals. Reducing debt can boost financial confidence while also easing the emotional symptoms associated with being in debt, like depression or anxiety.Disclosure 5 

3. Invest in your future

A recent survey found millennials feeling pretty confident about retirement, with 68% thinking they’ll be able to retire when they want. Committing to a retirement savings and investment plan can get you there—but starting now is crucial. If you begin early, you have the benefit of time and compound interest to help you reach your goals. Whether it’s an employer-backed 401(k) or an IRA, putting a portion of your tax return toward hitting your retirement goals is a smart money move.

Read more: 7 tips for hitting your retirement goals

4. Spend the rest on what you value most

Values-based budgeting is a trending concept that’s about creating a budget customized uniquely to your goals and the things you feel are most important. For instance, while many advisors suggest saving at least 15% of your income for retirement, if you want to retire early, your contribution should be closer to 50%, or as much as possible. Your budget will look different if your goal is to retire ten years earlier than most—but if that’s what’s most important to you, then it’s worth the investment.

On the other hand, if buying a car is truly important to you now, using a portion of your tax refund toward a down payment may not be a bad investment. Just be sure you weigh your options and make sure that car is what you’ll really value most. And if you do take your tax refund car shopping, shop smartly and account for all the costs that come with it.

Your values-based budget will look different from everyone else’s. If there’s an expense that’s high on your values list, spend some of your tax return on it, guilt-free. Maybe it’s not a car but investing in your home, your personal health, or an experience with loved ones. Whatever you decide to do with your tax refund, use it in a way that empowers you. 

Read more: A guide to budgeting: 4 ways to get started

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