5 Ideas for Making the Most of Your Tax Return

If you’re one of the lucky Americans getting a tax return this year, you may have already fantasized about all the exciting ways you can spend those funds. While it’s fun to think about splurging, it’s ultimately more satisfying to use that money to strengthen your financial position for the rest of the year and beyond.

Here are five ideas for making the most of your tax return.

Contribute to Your Emergency Fund

It’s easy to put off bulking up your emergency fund — or promising you’ll start contributing next paycheck, or next month or next year. But we never know when emergencies will strike — only that they will. It’s a smart move to contribute what you can from your tax windfall so you can get ahead of unexpected expenses.

As of early 2020, fewer than half of Americans (41 percent) could cover $1,000 in emergency expenses with savings. The same Bank rate survey found that 37 percent of respondents would have to take out a loan, put the expense on a credit card or borrow money from family — and that the average unexpected expense came in around $3,500.

Rather than thinking of building an emergency fund as an all-or-nothing proposition, commit to contributing a small percentage of each paycheck — then making larger contributions from sources like tax returns or bonuses at work.

Pay Down Your Outstanding Debts

The longer you’re carrying debt, the more interest you’ll pay. Therefore, it’s in your best “interest” to eliminate debts as expediently as possible, especially when it comes to high-interest debts like credit cards.

If your tax return won’t cover your current debts and you’re not sure how to get a handle on them, it may be helpful to make an appointment with a consumer debt counseling service. A credit counselor can help you look over your budget with a fine-tooth comb and identify opportunities for improvement, as well as provide educational resources about personal finance. Best of all, this resource is typically free of charge.

Save for a Specific Goal

Maybe you’ve been meaning to visit your family on the other side of the country. Perhaps you’re saving up a down payment on a new vehicle. You could be planning a wedding or anticipating the arrival of a new bundle of joy. Maybe you’re trying to get solve your own small business taxes.

Whatever your goals, you’ll need funding to turn them into reality. A tax return is an excellent opportunity to invest in your own future. Be sure to earmark the funds or, better yet, deposit them into a designated bank account set aside for a singular goal.

Fund a Home Improvement Project

Part of owning a home is updating it periodically. Of course, the exact cost of any given home improvement project will depend on its scope, materials and labor.

While a project like a minor kitchen remodel can improve the overall appearance and functionality of the room — as well as provide a return on investment if you ever decide to sell your home — it can easily cost thousands of dollars to complete. Before diving in, you’ll want to have at least a healthy percentage of the project tucked away in savings so you can avoid having to take on tons of debt.

Donate to Those in Need

If you find yourself in a fortunate financial situation and have your bases mostly covered without your tax return, there’s never been a better time to pay it forward within your community. Donating to an organization like a local food bank, animal shelter, literacy center, or family in need is a noble pursuit — plus you may be able to claim charitable write-offs come next tax season.

Your tax return represents an opportunity to gain some financial ground on your goals, whether it’s saving money, stashing away emergency funds, upgrading your home, paying down debts or helping others.