5 smart ways to spend your tax refund

Photo of a large and small change gar depicting that you should use some of your tax refund responsibly.

Whether your tax refund is big or small this year, it’s tempting to splurge with that modest windfall. These five ideas can keep the "fun" in your refund while being mostly responsible and strategic with your money. 

The key to “fun-sponsible” is using a small portion—say 10%—for fun. Then use the rest to get ahead on one of your financial goals. Last year’s average refund, according to the IRS, was $2,869. The fun portion of that could be about $287. The other 90%—$2,582—can be your responsible money. 

But this isn’t just fun plus responsible. The strategy works best when both parts are connected. Here are five balanced options for this year’s tax refund. 

1. Have a tax-themed date night/debt night.

Fun: How long has it been since you and the significant other had a date night? Use your fun money to hit the town. A small refund may mean a food truck and movie streaming, or a bigger one can send you to that new Middle Eastern restaurant then the multiplex. 

Responsible: Log in together and use your bank’s bill-pay function to tackle debt. Regardless of how much you got back, focus on paying down a higher-interest debt, rather than spreading the money around. Maybe your focus is credit cards or student loans. Just take a chunk out of a high-interest monster together to allow some financial breathing room. 

2. Create an emergency fund for a rainy day.

Fun: By the time Tax Day (April 15) rolls around, spring will have sprung, and all those great new raincoats will probably be on sale. Use your fun money to pick up a brand-new waterproof jacket. If your refund was already “fun-sized” this year, maybe a new umbrella is your thing. 

Responsible: Many financial experts agree that you should have an emergency fund to help pay for unexpected expenses. Three to six months of regular expenses is a great target. You can use your responsible refund money to build up that cushion. 

3. Treat your (future) self by opening an IRA.

Fun: Want to get a grip on calligraphy? Maybe a knitting class to stitch together your Etsy dream? Or a vegetarian cooking course to heat up those culinary skills? Enroll to learn something new that’ll bring you pleasure for years to come.

Responsible: While you’re investing in yourself, don’t forget about Future You. You can use the rest of your tax refund to contribute to a traditional IRA or a Roth IRA. Your traditional IRA contribution may even be able to lower your 2020 taxable income. By the time you retire, that $2,582 could turn into an extra $14,000 in your IRA.1

Bonus responsible item: You could also invest in the next generation. If you’ve got kids, start or contribute to a 529 plan to help with their future college expenses.

4. Cover your bases with life insurance.

Fun: Springtime opens baseball season. What better way to use your re-FUN-d than by heading to the ballpark? There are plenty of options, with hundreds of major and minor league clubs in the United States, and even more college and local teams.

Responsible: Help take care of the people you love by using your refund to fill in any life insurance gaps. It’s not fun to think about what would happen if you’re not around, but it helps to put the appropriate amount of protection in place, for their future and for your own anxieties. Life insurance is available for nearly every need and budget. And the earlier you get it, the less expensive it is.

5. Put your tax refund to good use in your community.

Fun-sponsible all in one: Take your night out to the next level and help a good cause by attending a charity event. So bid on that bit of movie memorabilia at a charity auction. Or get your gang together for a fundraising gala. You can combine an elegant night out with helping others.

What to do next

  • Interested in learning about Principal’s 529 plan, Scholar’s Edge? Visit scholarsedge529.com.
  • Adjust your retirement contributions or start an IRA. Log in to review your account if it is with Principal®.

1 Assumes a 6% annual rate of return. With 30 years to grow, $1,865 could turn into $10, 711. The assumed rates of return is hypothetical and do not guarantee any future returns nor represent the returns of any particular investment. Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. This is for illustrative purposes only. 

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.