While doing your taxes is often accompanied by dread, confusion, and an overall sense of disgruntlement, the end result can leave you with a pretty penny. "For some of us, your tax refund is your biggest paycheck of the year, so it's a really good opportunity to grow your long-term savings," says Dave Nugent, chief investment officer at Wealthsimple. While it may be tempting to move extra money straight to your checking account to use for daily purchases or perhaps a few indulgences, Nugent recommends against this common money reflex.
"The first thing you want to do when you get any kind of lump sum of extra cash is get it out of your checking account," Nugent states. "If you don’t, odds are you’ll end up spending it on day-to-day expenses before you even realize it." Instead of falling into this trap, Nugent suggests first prioritizing your long-term finances. Then, you can set aside a fraction of your return to spend on fun things, like a summer vacation or a big ticket item you've been eying. Here are 15 things to do with your tax refund things year.
1. Pay Off Any High-Interest Debt
"If you’re paying double-digit interest on any of your debts, this is the first place your money should go," Nugent says. "If you spend your money elsewhere and let these go, you’ll end up losing more and more money over time." This means it's time to make payments on things like credit cards and student loans.
2. Establish an Emergency Fund
It might feel unnecessary now, but starting an emergency fund can pay off in the long run. "An emergency fund is the kind of thing that you won’t appreciate until you really, really need it," Nugent says. He recommends saving up about three to six months of living expenses in a no-risk account. This fund is for any kind of unexpected event like losing your job, getting injured, or dealing with home repairs.
3. Contribute to Your 401(k)
It's easy to put off, but if you work for a company that will match 401(k) contributions, you'll want to take advantage. "If your employer matches 5% of your contributions, that's a guaranteed 5% return on the money you put in," Nugent explains.
4. Contribute to Your IRA
"Every dollar that you contribute to an IRA is a dollar off your taxable income," says Nugent. "Instead of waiting until right before the deadline, contribute that money you have now—you'll lower next year's tax bill, and your contributions will have an extra year to grow."
5. Start Other Investments
"Investing may seem intimidating, but it can be easy and approachable for investors of all experience levels to get started," Nugent says. With digital investment companies, like Wealthsimple, the whole investment process is automated, meaning you can easily start investing and keep track of your money through your phone. "You might also want to consider a Socially Responsible Investment portfolio that diversifies your money across companies that align with your values—our portfolio prioritizes the environment, gender diversity, or affordable housing, among other issues," explains Nugent.
6. Add to Your Short Term-Savings
While you don't want to leave your money sitting in a checking account, it may be a good idea to think about your short-term savings after receiving your tax return. "Investment accounts are great for your long-term goals, but for money you plan to use within the next three years—for a down payment, a vacation, a renovation—a savings account is best," Nugent says.
7. Invest In Your Career
"There are two ways to increase your net worth: Make more, or save more," Nugent states. One way to make more is to invest in your career. Nugent suggests signing up for a course that will help you upgrade your skills. "Investing in yourself as a professional can help you earn more money in the long run, which is always a great goal."
8. Contribute to Charity
It's always a good idea to invest in something you care about. "Money you give to the causes you’re passionate about not only makes you feel good, but it impacts positive change on the world," says Nugent. Of course, he also points out that you can also deduct charitable donations on your tax return next year.
9. Home Renovations
"Home improvement is another one of those important expenditures that can increase both your happiness and your wealth," Nugent says (and we couldn't agree more). "Not only will you have a living space that you’re comfortable and happy in, but you can also increase the value of your home when it comes time to sell it."
10. Do Something Fun
Finally—the fun part! Even a chief investment officer agrees that you have permission to spend your tax refund on something special. "After you’ve made sure all of your major financial needs are taken care of, go ahead and spend 15% to 20% of your refund on something fun," Nugent advises. "Money is there for you to enjoy, and it’s important to treat yourself. So if you don’t have any high-interest debt, you feel secure with your emergency fund, and you've topped up your long-term investments, go ahead and splurge a bit."
Not sure how to best utilize that 15% to 20% of your tax refund? We've come up with a few of our own ideas for things to do with your tax refund. See what we'd splurge on below.
11. Book a Trip
Tax season just also happens to be springtime, which means your home could probably use a refresh. Here are a few easy ways to effortlessly upgrade your space.
14. Splurge on a Bottle of Fine Wine
If you're one for the finer things in life, invest a portion of your tax return on a beautiful bottle of your favorite wine. Time to sip and savor.
15. Prioritize Your Health Goals
13. Indulge in a Bit of Self-Care
Whatever you spend your tax return on, just be sure not to blow it all on one thing. "A lot of people see their tax refund as free money and spend all of it in one go," says Nugent. Instead, plan ahead and make an informed decision. "Decide how you'll use the money before you get that check. That way, once the money hits your account, you'll know exactly what you're doing with it and won't be tempted otherwise."