How to Use Your Tax Refund Wisely

Aimee Cerka
by Aimee Cerka

Are you wondering how to use your tax refund wisely? The answer? It depends! But there are formulas to use when you receive a chunk of money, like stimulus checks, unexpected refunds, and other larger disbursements of money.


So let’s take a look at what to do with your tax refund and what not to do with your tax refund.

For me, it’s a priority to give 10 percent of all income that comes into the household. You know that 10 cents on every dollar of my gross revenue that comes into my company is given to Operation Underground Railroad, the non-profit agency that helps fight against child trafficking.


When you get your tax refund, you have already technically given that money since it’s just a loan that you’ve given to the government. So, if you’ve given 10 percent of your gross income throughout the year, you technically have already given 10 percent and don’t need to do that with your refund. But this is entirely up to you.


There are other categories and smart things you can do with the other 90 percent of your tax refund. Here are the things I’d consider doing with the money:

Paying bills

1. Pay bills

If you have bills past due, get caught up to eliminate late fees.


2. Funding your contingency fund

This is also called an emergency fund. You need to have a minimum of one month of emergency expenses available in cash and your return can help you get there.


I don’t believe it’s smart anymore to have three to six months of cash sitting there doing nothing, not with the rate of inflation right now, you’re losing too much money if it just sits there. You can have more months of money available but in other levels of assets.


3. Saving for annual expenses

Annual expenses are things that come up yearly, but not monthly. That would include back-to-school items, holiday gifts, home repairs, homeowner association dues, chimney cleaning, new clothes for kids, extra-curricular activities, car repairs, and car maintenance.


A savings fund for these annual expenses will help keep your monthly budget in line. This fund must be separate from your contingency fund. An annual expense fund helps you get ahead so you can pay cash for Christmas or other holidays.

Paying off debt

4. Pay off debt

This is the time I re-evaluate my debts to see if I can pay something off or put a chunk of money towards it. I will tell you that if you’re thinking of paying medical bills with your refund, you should call and offer to settle with them first and offer 70 percent.


The hospital or doctor may not always take 70 percent, but if they don’t take it and you offer 80 percent, they’re not going to say no to that. It’s still a good deal for them so do not feel like you are ripping them off. Or, you can knock off a chunk of credit card debt with your refund.


5. Invest in your business

If you have a business, use your tax refund to invest in it.


6. Something fun for you and your family

I’m not telling you to go blow the refund on a new tv or a new handbag. But if you’ve been in a tough, tight time, it’s important to have a positive association with money and feel good about money.


It’s very validating to do something good and enjoyable for you and your family, especially if you’ve been in that situation.

How to use your tax refund wisely

Let’s talk about percentages

So how do you break up that 90 percent into the above categories? I typically like to break up the money and disperse funds into two or three of these categories.


For example, let’s say we’re going to put 30 percent towards the annual expenses fund or contingency fund. Then use 30 percent to pay off debt. Do 25 percent towards funding your business. Finally, you have 5 percent left to do something for yourself.


It doesn’t have to be this elaborate thing, it can be something small but it needs to be something fun and not what you’d normally do–like going to a new restaurant for a nice dinner, getting a sitter so you can go out to the movies, or get a massage.


Whatever you do, it has to be something you feel good about, and it has to be something that you want to do, not that you need to do.


How to use your tax refund wisely

That covers smart money moves for your tax refund. You’ll use your tax refund to cover a combination of these categories. You can play around with the percentages that work best for you.


I’m hoping you now have a clear strategy for the best way to use tax refund. Please comment below to let me know if this was helpful to you.

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