10 Best Ways To Spend Tax Refund Money In 2020

It is the time of the year when Americans file their taxes and hope to get some money back from the IRS. It’s the second year after the Trump administration’s tax reform that promised tax savings to millions of low and middle-class people. Frankly, it was not a big win for our family. Did you already finish the return and find yourself among the lucky folks who received a refund? Then you might be wondering now what the best ways to spend the tax refund money are?

(If you didn’t file the taxes yet, H&R block software offers cheaper than TurboTax option – check it out. You can start with a free trial, no obligations).

The truth is there is no one best way to use tax refund as everyone’s situation might be different. Some people are deep in credit card debt, some need to think about an upcoming retirement. There are so many financial needs in our lives that it’s really hard to prioritize between them.

To make this decision easier, I want to recommend the same principles that Dave Ramsey mentions in his famous book “The Total Money Makeover”, but with some additional personal touches. (By the way, it’s a really good book to start with if you are looking to improve your finances.)

You can guess that my idea of spending tax returns wisely doesn’t start with splurging on a luxury restaurant or designer clothes (however it does end almost there, keep reading).

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Smart ways to spend tax refund

1. Start Or Grow Your Emergency Fund

The sad reality is that too many Americans will find it hard to come up with $1,000 in case of an emergency. Actually, the Federal Reserve survey has found that 40% of adults can’t cover even a $400 urgent expense. A broken car or an AC unit fix cost would be just put on a credit card, to add to already heavy debt burden. David Ramsey’s proposal is to establish the emergency fund of $1,000 as the first step to financial independence. Unfortunately, the prices kept rising since that book was written and now I would recommend at least doubling this amount.

If you don’t have $2,000 in cash or liquid account – this is one of the best uses of your tax refund money. You don’t have to keep the stash under your mattress. High yield saving account with fast and easy access can serve for this purpose and even make you some money (about 2.25% as of March 2019).


2. Urgent Investments In Your Health And Your House

If you live from paycheck to paycheck and don’t have an emergency fund, there might be something that you really need for a long time but couldn’t afford.

My dryer was making screeching noise for months, while I was hoping that in some miraculous way it would fix itself. It went from making the noise once in 15 minutes to once in 5 minutes but I didn’t lose hope, knowing how much it costs to call the professional in. I even convinced my husband to open the dryer and look inside. We did it, but paused, being terrified that we won’t be able to put it back together. The funny thing is that the noise stopped for a while after that (did we managed to scare the dryer?).

Long story short, we ended up paying $200 to a professional for replacing several parts. The dryer is back to life.

If you have an appliance, a car or an issue with your house that requires attention – just fix it and move on. The tax refund can be a great help in such a case.

Even more important, if you are delaying any medical or dental procedure or doctor visit because of the cost – use this IRS return to get it done. You are your most valuable asset. Please, never neglect your health, my friend.

3. Pay Credit Card Debts

Once you are all set with the emergency fund, check if you have any past due bills or credit card debts. There are many ways to start paying off the debt and using the tax refund is one of the less painful options.

Related post: How To Cut Credit Card Debt? 7 Easy Ways To Start Today

If you have many different debts and loans, you might want to consider debt consolidation and refinancing. I highly recommend a service called Credible for refinancing credit card and student loans. Everyone’s situation is different, but it’s worth to check out, as it’s possible to reduce the interest rate and monthly charges. Comparing prequalified refinancing rates with Credible only takes a few minutes and wouldn’t affect your credit score. They guarantee the best rate for you. If you find a better rate elsewhere, Credible will give you $200.

Once you did your best with debt consolidation, pay off the most urgent bills, the credit card balance with the highest interest rate or just reduce the balance of the new loan.

4. Make a 401k Contribution

If you are free from credit card debt and student loans (congratulations!), the next few steps offer you the best ways to invest your tax refund.

First of all, I recommend you to take a holistic look at all your finances and retirement plans. My favorite free software that allows tracking of all your financial accounts and net worth in the same place is Personal Capital (check out my full Personal Capital Review here). You will be able to evaluate your path to retirement and decide if you need to invest more in your future financial comfort.

If your employer offers a match to your 401k or equivalents contributions, it will be the best and almost unbelievable way to make a 100% risk-free return on your additional contribution.

For example, if the employer matches up to 3% of your $50,000 salary, then you’ll get an additional $1,500 for the first $1,500 you put into the 401k plan.

Actually, you should always maximize employers matching of 401k, meaning make every effort to put these first $1,500 in. Of course, it’s also tax-free money and will reduce your next year’s tax liability.

5. Maximize Health Savings Account (HSA) Contribution

If you are already at a maximum with your 401k matched contribution, the next best way to save is a bit unexpected – the HSA!

Not all employers offer this type of health insurance as it usually means higher monthly payments. However, if you have and use this option, consider maximizing the HSA, as it’s tax-free money not only now, but also AFTER retirement if used on qualified medical expenses (after retirement you can use it for anything else as well but then it will be taxed, same as 401k).

Do you know many retired people that don’t have any medical expenses? I don’t.

The HSA doesn’t expire if not used in the same tax year, like the FSA (Flexible Spending Account), and remains yours when you leave the employer or retire.


6. Make An IRA Contribution

The next option is to consider investing in the IRA (an Individual Retirement Account). Before doing this, check with your accountant (or at least online) if you are eligible for any tax benefits and how much you can contribute. If you maxed out your 401k plan, you might not be eligible for additional tax-free contributions.

7. Invest For Long Term

If you are set with the maximum allowed tax-free retirement savings, you still might need more savings to achieve your personal retirement goals (again, it’s easy to check with Personal Capital free software).

Being a financial professional myself, in my everyday reality, I don’t have the time for monitoring financial markets and analyzing every possible investment. The majority of people don’t have the skills to do it and are not really willing to learn and that’s ok. As long as you understand the basic idea of compound interest and the time value of money, you know that the best way to grow wealth is consistent long term investment in financial markets.

The easiest way to do it (really set it and forget it) is with a robo-advisor app, like Acorns that takes care of building the right investment portfolio for you. For example, with Acorns you can save and invest the round-ups of your credit card transactions, set up weekly or monthly contributions or invest a one-time amount from your tax return money. By the way, Acorns has IRA accounts as well.

Related posts:

What Is Acorns Investment App? The Best Way To Start Investing With Little Money

How To Sign Up With Acorns Investment App – New User Walk-through

How Behavioral Finance Helps You With Financial Decision Making?

8. Save For Your Children’s College

As a parent, I have to think about the upcoming education costs for my three kids (not that their current elementary school is cheap…). I’m not planning to pay in full (well, I just can’t afford it) for their college, but I’d like to help a bit, while I hope that they will find some creative ways to come up with the rest of the tuition and cost of living.

You know, it’s never too early to start a college fund, so even if your baby is still in diapers, you can open a 529 fund and let the money grow tax-free! Some states, like NY, even give you a tax credit for doing this.

9. Make An Additional Mortgage Payment

If you are on the right path to retirement and have enough money in your 401k, IRA and other investment accounts, you can consider making an additional payment of your mortgage.

Living in a house without a mortgage gives a better feeling of financial security, so I totally can relate to the desire to reduce the mortgage balance.

However, before making this payment, check out the balance and the interest rate. If your balance is relatively low (less than 50% of the house value) and the interest rate is low (compare to the high-yield saving accounts that pay about 2.25% as of March 2019 and to the average financial markets return of about 7.5% in the long term) – may be investing the money is a better option?

On the other hand, having a high balance and interest rate creates a big risk for your family that you might want to reduce.


10. How About A Little Splurge For Yourself?

I still like the advice I’ve got a long time ago when I tried to make money from daily trading with stocks. I was not successful at it, but I remember the advice. It says – take 10% of the profit and get something nice for yourself – a vacation, a new handbag, spoiling massage or a new car, depends on the size of that profit. Put the rest into work by investing it again. The reason behind this is that we need to FEEL our success, that it makes a difference in our LIFE, not only in the number of dollars in our bank account.

I like to apply this rule to any unexpected money I get. However, the tax return is a different story. If you get the check from the IRS now, it means you didn’t plan your taxes right and actually gave an interest-free loan to the government. Now they returned your money back. It’s not similar to winning the lottery and getting a prize. The tax return was YOUR own money from the beginning.

The good thing about it is that somehow, for better or worse, easily or by struggling, you have survived the year without this money. Maybe it cost you depriving yourself of these small splurges, but you did it. So why not have some fun now? Sometimes a little cheer up is all we need to refill our energy and continue moving in the right direction.

The bottom line is that if there are no acute emergencies, you can consider spending a portion of your tax refund on yourself, on a little something that makes you smile.

Plan Your Next Year Taxes

Before I close, another important thing to do is to analyze the reason why did you get this tax refund, especially if the sum is quite big related to your income.

Why did you overpay taxes and helped the government to finance itself without paying you an interest?

  • Check if you can update your W-4 form and claim more dependents to reduce the tax deductions from your paychecks.
  • Did you add any voluntary state tax deductions that turned out unnecessary?


Leave me a comment and tell me what you did you do with your tax refund money?

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My name is Mary and I'm the owner of MoCash For You.

14 thoughts on “10 Best Ways To Spend Tax Refund Money In 2020

  • March 22, 2019 at 4:15 pm

    wow… well, I live in Costa Rica and stuff here is super different, the only taxes we pay is 9.34% of our salary, deducted by our employer and that covers taxes and health insurance. But I know how stuff works in the US and it’s crazy, I never thought you could actually do so many things with the money you receive back, I never thought of it, must be a lot thou cause one of the things listed is pay credit card debst and most credit card debts are nasty! 

    • March 22, 2019 at 4:36 pm

      Hi Maria,

      I envy the low taxes you have in Costa Rica! (I’m thinking to visit in the upcoming two years).

      Actually, this guide is good for any unexpected money you might receive, not only tax refunds. The priorities would be the same, in my opinion.

      Thank you for visiting


  • March 22, 2019 at 4:00 pm

    This is fantastic. Tax returns are not just a free money you get overnight, you actually worked for and deserved it. I did like to say I cherish number 8. I would rather pay my children’s education and see it as an investment into the future. I really appreciate this article and I will like to share this article with many if my friends and family.

    • March 22, 2019 at 4:34 pm

      Hi Olanike,

      I’m glad you find this post useful. Kids education is a great investment. I usually put max state deductible amount in 529 funds every year.

      Thank you for sharing your thoughts


  • March 15, 2019 at 8:38 pm

    Thanks for writing this article on best ways to spend tax refund money.i must commend you for taking your time to write this article. I find it so helpful in what I need to do with my tax refund money this year.i have some credit card debt I need to pay off which is not much and am also thinking about how to invest for long time.thanks once again ,I hope many find this article helpful 

    • March 15, 2019 at 8:52 pm

      Thank you for stopping by.

      Credit card debt is very expensive, so it’s a good idea to use your tax refund to pay off this debt.

      If you have anything left after that, investing this tax money is a great option as well.


  • March 15, 2019 at 8:31 pm

    I believe your number 10. where you state a little splurge for yourself, lol, that is probably most people’s number 1 and only.  Honestly, I think people just go out and spend their bounty without ever giving it much thought.  It’s ridiculous.  Everyone should read this article, but you actually give really well-thought-out, solid advice on how people should spend their tax returns.  I am going to share this article with each of my four adult children.  They may learn something!  Awesome!

    • March 15, 2019 at 8:48 pm

      Hi Babsie!

      Actually, it depends on the amount of tax return money. If you only get $100, there is not too much to think about, even though $100 can be a nice start to an investment account with Acorns, for example. But some lucky folks might get several thousand bucks as a tax refund. In this case, I’d go through the steps I’ve mentioned and give it real thought.

      The same guide will work for any unexpected money you want to spend (or save?)


  • March 12, 2019 at 12:13 am

    Great article! Thank you for all this very sound advice. Yes, It’s the first year after the Trump administration’s tax reform that promised tax savings to millions of low and middle-class people. In relation to the article as I have been doing before. I use my tax refund very similar to what recommended in the article for emergency funds as the first step to financial independence, catching up on bills and investing for long term, as am set with the maximum allowed tax-free retirement savings, and still might need more savings to achieve my personal retirement goals. The article had already opened our eyes to many profitable ways to spend our tax refund money  as you wish is nice for yourself. Whether it’s a major windfall or just a drop in the bucket, your refund should feel like “found money” and if you’re smart, you can put it to work for you and improve your financial situation. You can even treat yourself and just don’t blow it at on a huge unnecessary splurge by start with splurging on a luxury restaurant or designer clothes. Are you getting a refund this year? What do you plan to do with it?

    • March 12, 2019 at 8:27 am


      I’m glad you agree with this advice and thinking to use the refund to achieve your financial independence goals faster.

      My taxes are not finalized yet, but looks like I’ll owe Federal taxes and will get similar money from overpaid state taxes, so there will be nothing to spend. Agh… Trump’s reforms, especially SALT capping, didn’t do too much good for my family.


  • March 11, 2019 at 8:45 pm

    Nice little article. I usually use my taxes to get caught up on winter bills that I normally fall behind on and if there’s any left I try to divide it between bank deposit in case of an emergency and some of it towards splurging on dvds, clothes and music gear

    • March 11, 2019 at 8:49 pm

      Hi Mike!

      Looks like you are using your tax refund very similar to what I’ve recommended – emergency funds, catching up on bills and something nice for yourself.

      Thanks for sharing!


  • March 11, 2019 at 8:04 pm

    Thank you for all this very sound advice. In relation to the dryer I would have done exactly what you did in checking for a fault and try to fix it. If the repair man said it would cost $200 I would have checked the price of a new one to replace it rather than spend that money fixing an old one.  I mend my husbands work overalls and I find that within a few weeks they have worn again in a different area and need to be tossed., I should have just replaced them with new and used my time on something else. 

    You presented some other very good tips such as growing an emergency fund and paying off credit cards..

    Credit cards can be a real trap and are almost impossible to clear if you fail on payments as the interest charged just increases the debt. 

    An emergency fund is a great idea as no one knows what is around the corner. A car accident, a broken appliance, the need to help a family member etc. 

    In Australia our workers all have compulsory superannuation and they can add extra to them if they have spare cash. We are self employed and as such we need to put aside for our future retirement.

    You speak as an accountant and obviously know your subject. Thank you for putting it out there for us to think about and act on. 

    • March 11, 2019 at 8:47 pm

      Hi Judy,

      I’m much worse – I mend my kids’ socks and pants if I hope to get some more use out of them.

      We checked the price of a new dryer and it was more than 500-600 as we need a large size. And I just don’t feel good tossing such a huge thing to garbage when it really can work for many more years. These broken parts were kind of normal wear and tear.

      I never heard about the Australian practice of compulsory superannuation. Thank you for sharing it with me, I have more to learn.

      I’m not really an accountant but my MBA is in Finance and Accounting, so I do know something about money and hope to help people to get control of their finances.

      All the best!



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