5 Tips for How to Use Your Tax Refund

For many Americans, tax season is windfall season.

And long before the refund has even arrived, the money is already mentally spent in countless different ways.

Tax refunds, however, present an opportunity to make some savvy financial moves and to also give back. The money for instance, could be used to make a socially responsible investment. Or it could be used to invest in yourself and your future.

“Many people will blow their money on something that will give them temporary pleasure, rather than a lasting impact on their lives or their family’s lives,” says Melanie Halstenberg, co-founder of West Virginia-based Arch Financial Services. “There are several ways you can voice your opinions through investments and also contribute to your future”

Vote with Your Dollars

Put your money where your values are, recommends Elizabeth Shutty, personal finance expert at Investor Junkie.

“People today complain about government policies and self-serving corporations. You know what I say? If you get a windfall like an inheritance, home sale or tax refund – put your money where your values are,” says Shutty. “Consider making the world a better place the next time you need to put some cash to work.”

Need a little help identifying investments that support your values? Shutty suggests companies such as Swell Invest and Wealthsimple, which offer funds that strictly support conscious, sustainable companies.

Invest in Alternative Energy

Solar, wind, and hydroelectric are just some of the alternative energies that are gaining ground with each passing day. But these forms of energy, which are key to a more sustainable future, are still not yet mainstream.

Halstenberg suggests using a portion of your tax refund to help support the progress of such alternative energies.

“There are a couple of ways you can do this,” says Halstenberg. “You can invest in companies that research and implement alternative energy sources to reduce our carbon footprint as a society. The second option is to invest in alternative energy in your own home. There are more and more solar panels on the roofs of houses every day.”

While a tax refund may not be enough to pay for the entire cost of home solar installation, it may be enough to help you get started.

Or it may be enough to cover the purchase of a tankless water heater, which only heats water when it’s actually needed, such as when a tap or appliance is turned on, thus saving energy.

“Whatever fits your budget,” said Halstenberg. “These moves can help reduce your energy costs and save more for the future and they also help the environment.”

Invest in Something has Growth or Long-Term Income Potential

Make your tax money work for you by putting it toward something that will increase in value over time or lead to salary or income gains.

Natasha Rachel Smith, personal finance expert for Top Cash Back, suggests a real estate purchase is one such example. Not only does real estate increase in value, it’s also a tax write-off.

Another option is using a portion of a tax refund to attend a seminar that fosters self-growth, or pay for real-estate classes, job skills programs or any other type of educational training that may translate into a salary or income increase down the road.

“One of the smartest things you can do with your tax refund is investing in yourself,” says says Dwain Phelps, owner of Georgia-based Phelps Financial Group. “Maybe you’re a couple of credit hours away from completing that degree. Whatever the case may be, investing to improve yourself is always a smart decision.”

Make Home Improvements

Those who are already homeowners may want to use tax refund dollars to cover the cost of upgrades and remodels, a move that will also likely pay dividends over the long term.

“With your home being one of your largest investments, put that tax refund to great use by adding some value to your home,” says Phelps.

Improve Your Financial Picture

While this may seem like the least fun option, many financial advisors suggest using a portion of a tax refund to pursue important financial goals, such as paying off credit card debt, establishing an emergency fund or increasing retirement savings.

“Any American that receives a refund has the opportunity to use it wisely and consider paying down consumer or credit card debt or create a savings account if they don’t already have one,” says Mark Kohler, a CPA and senior tax advisor for Tax Slayer. “The average credit card balance amongst Americans is at an all-time high, and the savings rate per American is at the second lowest rate in recorded financial history. The economy is doing great and we have the opportunity to use extra money to get out of debt and save for the future.”

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Image credit: AntonioGuillem