5 Ways to Put Your Tax Refund to Work for Your Financial Health

put tax refund to work

By Lauren Bringle Jackson

In a pinch until your tax refund comes? Maybe you racked up credit card debt from holiday spending, maybe life hit you with an emergency you weren’t financially prepared for. Either way, you’re not alone.

We conducted a study with OnePoll that found, of the people anxiously awaiting their tax refunds, one-third admitted they’re “very dependent” on their refund coming through.

In fact, going without a refund – or worse, owing taxes – would completely derail nearly 44% of respondents’ budgets for the next year. See more insights from our tax refund survey.

If you’re counting the hours until your refund hits your bank account, it may be time to think differently about your finances. Do your future self a favor. This tax season, try to look ahead, get your finances in order and start working towards your own financial health.

Here are some practical ideas and tools to help you do just that.

1 - Adjust your withholding to increase your paychecks year-round

If you struggle financially and rely on your tax refund to get by, it could be because too much of your paycheck is withheld for taxes throughout the year. Any time you overpay your taxes and wait for a refund, you give the government an interest-free loan.

What if you got a lower refund but could have more money each paycheck to pay bills and save throughout the year? That’s where adjusting your withholding might help.

To adjust your withholding, complete a new W-4 form for your employer, which you should be able to get from your HR department. You can use this handy withholding calculator from the IRS to help figure out how to fill out the form.

Just be careful, if you don’t have enough withheld, you could end up owing the IRS instead of getting a refund. If you’re ever uncertain about which route to take, talk to a professional who specializes in tax preparation.

2 - Start (or add to) your emergency savings fund

Instead of spending your tax refund on paying off debt or taking a vacation, why not put part of it towards an emergency savings fund? This fund, typically held in a savings account, creates a financial safety cushion you can pull from in case of a medical issue, job loss, or other emergency.

Many experts recommend keeping about 3 months of living expenses in emergency savings. Don’t worry if that sounds like a stretch, just start with whatever amount you can.

In my life, this is the savings I don’t touch unless I literally have no other choice.

Why? Before I became a financial counselor, or understood the basics of financial health, I thought you only saved money to spend it later. For example, you saved money, then took a cool trip somewhere. Or you saved money, then bought a car. While I was excellent at saving, I routinely drained my savings account to buy something fun or essential.

When a major medical emergency hit suddenly, it meant I had no money left in savings to cover the bill. And I couldn’t work for a month because of my health, so I couldn’t depend on my income.

I guess you could say I was up a creek without a paddle, which is a polite way of expressing all the expletives that come to mind when I think back to what that time was actually like for me.

My point? Save some of your money only for emergencies.

And your tax refund could be a great boost to start that nest egg.

Tools to help you save

If you want to maximize the value of your emergency savings fund, check out some of the high-yield savings accounts out there, like this one from Varo.

These accounts can help you grow your money faster, but they’re mostly available online only.

Need help figuring out how to save? Connect with a local resource through SpringFour that could help you save money on food, utilities, housing and more.

On average, people who use SpringFour reduce their expenses by $250 per month, based on their survey responses.

While everyone’s experience is different, imagine what you could do with a little extra cash in your pocket? Or in your emergency savings fund.

3 - Build your credit

Your credit score is like an insurance policy for your finances, Erin Lowry of Broke Millennial says. You have to build and maintain it before you actually need it or it’s too late.

There are two basic ways to use your tax refund to build your credit:

  1. Pay off what you already owe.
  2. Open a new credit account.

According to that same Self survey mentioned above, 44% of respondents plan to pay off their credit card bills with their tax refund. If you need to build credit, this can be a smart move, since your credit usage (utilization) is a major factor in your credit score.

But what if you don’t have credit and need to start building from scratch? Or you have a history of bad credit and struggle to gain credit access? Consider putting some of your tax refund towards getting a Credit Builder Account from Self.

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Each month as you pay into that account, Self reports your payments as a “secured installment loan” to the 3 major credit bureaus – Experian, Equifax and TransUnion. At the end, the money inside unlocks and comes back to you, minus interest and fees.

You’ve built credit, and set money aside for your future self.

Once you get that money back, guess what? That could make a great addition to your emergency savings also.

4 - Meet with a Financial Counselor

If you’re struggling to save money, pay down debt, build credit, etc. and need some one-on-one guidance, consider using some of your tax refund to schedule time with an Accredited Financial Counselor®.

Their rates vary, ranging anywhere from free or low-cost to a standard hourly rate depending on the counselor. But they can help create a plan tailored to your specific needs and financial goals.

Unlike many financial advisors or planners, many financial counselors do not earn a commission based on selling you certain products. So they’re more likely to help you create an action plan that can benefit you directly and help you establish a firm financial foundation. But if you’re ever unsure about how someone makes their money, just ask.

To find an Accredited Financial Counselor® near you, visit the AFCPE directory of financial counselors.

5 - Invest in your future

Once you have your basic financial needs met and a solid emergency savings in place, start thinking about investing. The way I see it, there are two general ways to invest your money:

  1. Invest so you can grow your current income.
  2. Invest in your future retirement.

If the purpose behind your investing is to grow your income, consider a tool like Acorns. You can start investing for just $5 and they also offer an option to round up your purchases and invest the spare change.

On the other hand, it’s never too early to start thinking about retirement. If your work offers a 401k retirement plan, consider putting some of your tax refund towards that. Otherwise, look into an Individual Retirement Account (IRA).

Except for Roth accounts, contributing to a 401k or IRA provides tons of benefits, like tax breaks, tax-deferred growth, and the benefit of earning interest on your interest.

I personally like robo-advisor options, such as Betterment, and if you want to support a woman-led, women-focused alternative, Ellevest.

Bottom line

There are tons of ways to use your tax refund to get serious about your financial health this year, while planning for your financial future. This tax season, don’t just get by, get ahead when it comes to your finances.

About the author

Lauren Bringle Jackson is an Accredited Financial Counselor® and Content Marketing Manager for Self Financial – a financial technology company with a mission to help people build credit and savings. She’s passionate about the intersection of business and social good and smart budgeting. She believes you can have an amazing life – even if you don't have the best health or the most wealth.

Written on January 13, 2020

Self is a venture-backed startup that helps people build credit and savings.
Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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