5 Smart Ways to Use Your Tax Refund

ways to use tax refund


A version of this article was reprinted on deseretnews.com on April 7, 2014.

First of all, if you haven’t done your taxes yet, this is a good reminder to get on it. You still have time. Not filing your taxes is not something you want to mess around with.

So you’ve filed your taxes and you’re getting a refund– What are you going to do with it? What should you do with it?

I’m definitely not a tax guy, so if you have questions about taxes, talk to your tax person. But I will say this about refunds…

I don’t typically like them.

If you’re getting a refund, you’re most likely withholding too much from each paycheck. Maybe that extra money each paycheck could help you with your monthly budget. You should adjust your W4 so at the end of the year you don’t owe any taxes, but you don’t get a refund either.

A refund isn’t a gift from the government. You overpaid and the government is sending it back to you.

I don’t like refunds for these reasons:

1) You could use that extra money each month to help pay bills, pay down debt, or just apply to whatever you are working on– an extra $200 a month could be a difference maker in many cases.

2) The government holds the money you overpay interest free; you could find a better use for that extra money.

But I know what everyone says– “I like getting a big refund, because otherwise I’d just blow the extra money I get each paycheck.” Or something like that.

Well guess what? If you don’t have a plan for what you’re going to do with your refund, you might just blow that, too. You have to be smart with every dollar you make. You work too hard.

If you have a budget and are on a plan, then any extra money you get should be used efficiently, whether its with each paycheck or a refund at the beginning of the year.

Talk to your tax person and find out how you can adjust your W4 or withholdings so you pay the proper amount of taxes without the government holding onto it for you interest free.

So you got a refund?

What you should do with your refund varies, depending on where you are in your personal financial life.

5 Smart Ways to Use Your Refund

1. Pay Down Debt

According to Bankrate.com, paying down debt is the most common thing people intend to do with their tax refund. This is great news. If you do this, congrats!

But you should be intentional about how you do it. Have a plan for which debts you are going to pay, how much you are going to pay, etc,. Do it on purpose.

I subscribe to the debt snowball theory of paying down debt. If you are following the plan I talk about and follow myself– the one the LDS Church teaches and the one Dave Ramsey made famous– you should pay off the debt with the lowest balance first.

Don’t just dump a little money here, a little money there– that isn’t efficient. Follow a specific debt pay-down plan and be intentional about what you are doing. Just apply the extra money from your refund to your current monthly income and monthly budget and follow your plan. Don’t do anything too drastic or too different.

If you don’t have an emergency fund in place, that should be the first thing you do with your refund.

2. Get an Emergency Fund

The emergency fund is a critical part of your financial plan. Having funds in place specifically for emergencies is vital.

If you have debt, it can be difficult to find the extra cash to set aside for emergencies– your tax refund is perfect for doing this.

How much should you put in your emergency fund?

It depends where you are in your financial plan. If you have a bunch of debt– aside from a mortgage– and you are now trying to get on a plan to pay it off, then you need a starter emergency fund. It should be at least $1000, not much more. You want to be putting as much money toward your debts as possible. The more you put toward the debt, the faster you will pay it off– logically.

If you don’t have any debt, make sure your emergency fund is about 6 months of your total household expenses. If you don’t have this much saved, use your refund to get it close to that number.

3. Save or Invest

If you are out of debt– not including the mortgage– you can use your refund to fund some retirement accounts or your children’s college or mission funds.

Depending on the investment type, you could max out your contributions for the year using your tax refund and not have to worry about contributing the rest of the year.

I’m not an investment guy either, so talk to your financial advisor or planner and find out what your particular contribution limits are and see if you can use your refund to max those out.

4. Add to Savings Goals or Fund a Budget Category

If you are in the process of saving money for a specific big purchase, use your refund to either add to the savings fund or reach your savings goal– Maybe you are saving up to buy a new couch that you’ve needed for a while, or to put a new roof on the house– this could be a good opportunity to speed up that process.

You could also use the return to fund a category in the budget that requires a monthly contribution. For example, car repair expenses.

There are some expenses that you cannot predict when it comes to your cars. But some you can anticipate; oil, tires, brakes, registration, inspections, and regular maintenance. If you figure out the total estimated costs of these expenses for the year and divide that number by twelve, you can get an idea of how much to budget each month.

You could use your refund to fund this category for the entire year; you then wouldn’t have to set aside the money monthly in your budget. It could also help you avoid having to use your emergency fund if something were to go wrong with the car, in this case. Try it with any expense category similar to this.

Only do these types of additional savings if you are out of debt and have a fully funded emergency fund.

5. Pay Down the Mortgage, Go on Vacation, Give

If your only debt is the mortgage, you have an emergency fund, you’ve maxed out your investment contributions, and don’t have any specific big savings goals you are trying to meet, then do something rewarding; take the family somewhere fun, pay extra on the mortgage, or do something philanthropic.

Obviously be smart about what you do with any extra money you have. But if you’re in this position, you probably have been pretty smart for a while now– I should probably be reading your blog and listening to your financial advice.


The key to being smart with your how you use refund or any extra income you come across is to make sure you are being intentional about it; doing things with a purpose. Don’t just let it come in one hand and out the other. Have a plan for your household. Take care of the needs of your house and your family first. Use the budget to tell your money what it should do– tell your refund what to do.


  1. says

    Great advise. I don’t get refunds anymore or at least not large ones; but when i did, paying credit card bills was first in line. I don’t have credit cards anymore, so if i had a refund now, i would treat myself to a short vacation to a national landmark…many years ago i read somewhere that said “go somewhere you’ve never been every year”…for me it’s usually day trips until i can save up for a plane+hotel kind of trip.

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