14 frugal uses for an income tax refund.

I’m getting an income tax refund this year. Well, let me rephrase that. I would be getting a refund, except that I’m applying it toward the quarterly taxes I pay as a freelancer. Whee!

What are you going to do with your refund, if any? My former MSN Money colleague Liz Weston suggests spending 10% of any windfall on something non-essential. So go ahead: Treat yourself.

But don’t let the rest of the money trickle away. Invest it in something, or several somethings, that will benefit you for the rest of the year – or even for the rest of your life.


I’m not going to address the idea that tax refunds are of the devil, i.e., that you gave the government an interest-free loan all year. It’s not optimal, I agree. But for some people – e.g., those who don’t yet have the discipline to save – a tax refund makes sense. (In my case it doesn’t. It just means I overpaid. Working on that.)

Instead, I’m going to address some useful ways to spend the money.


Financial fixes

1. Pay down your credit card balance. After you’ve given yourself that 10% treat, throw whatever’s left at your consumer debt. If it’s a large balance you may not feel that you’re making much difference. You are, though.

2. Seed money for your emergency fund. Again, even a smallish refund is a start. Once you’ve got an account seeded, you’d be surprised how exciting it can be to add to it, even if (especially if) you are living paycheck to paycheck. For tips on squeezing blood from that particular turnip, see my Get Rich Slowly column, “Think you can’t afford an emergency fund? Think again!” (And if you’re lucky enough to have a decently funded EF already? Start working on a plain old savings account, too.)

3. Build your own personal food bank. Fill your larder with dry beans, tuna, canned tomatoes, pasta, sugar, flour, oatmeal and the like. A well-stocked pantry means less temptation to order in – and if there’s a financial crisis such as illness or layoff, you’ll have what Liz Weston calls “the emergency fund you can eat.” Extra frugal points if you buy some of this stuff on sale with coupons.

4. An individual retirement account. Don’t have a plan where you work? Let your tax refund be the beginnings of a more secure old age. Research this on your own or meet with a professional. Just do it. This year. Please.


Toward a healthier you

5. Visit the dentist. Start watching now for new-patient specials (which usually include X-rays) or even for social commerce deals through Groupon et al. I saw one such deal in Phoenix recently: X-rays, exam, cleaning and teeth-whitening kit for $29. That is not a typo.

6. Visit the optometrist. How old are those glasses, anyway? Look for deals through social media (see above) or in the Sunday coupon inserts for discount vision centers.

7. See a doctor. When was your last physical? Maybe quite some time ago, if you don’t have health insurance. Look for a community or public health clinic, where you’ll pay based on your income; with a tax refund, you’ll be able to pay cash. Remember, there are “silent” ailments that can do major damage. Get yourself checked out.


A year’s worth of savings

8. Prepay your auto insurance. See if there’s a discount for paying 12 months at a time rather than twice a year or, heaven forbid, monthly.

9. Warehouse club membership. A dedicated couponer can beat Costco’s or Sam’s prices on many staples. If you’re not a clipper, a warehouse club might be the place for you. Better to buy a crate of toilet paper at a fixed price than to pay more if TP isn’t on sale the week you run out. Memberships don’t cost too much, so even a small refund will cover this.

10. Transit pass. If I commuted by bus in Seattle I’d pay $2.25 to $2.50 each way, or $22.50 to $35 a week. A monthly pass costs $81 to $90, and I’d get to use it evenings and weekends, too. See if you can get a monthly pass where you live.


Frugal hacks

11. Buy discounted gift cards. Do you purchase cat litter at PetSmart or Petco? Get your hair cut at Regis? Outfit your kids via Kohls clearances? Stretch your dollars even further by paying with gift cards obtained on the secondary market. You’ll see discounts of anywhere from 5 to 20 percent (or more) on a ton of everyday items as well as treats like movie theaters and restaurants. I did a Get Rich Slowly column on this technique, which I frequently use myself. Hint: There’s a price comparison site to show you the best deals, and you can set up “alerts” for the cards you want.

12. Home improvement. Not granite countertops or new cabinetry, but something that will impact the bottom line. Examples: New windows to replace some of the heat-leaking old ones; an energy-efficient fridge; the down payment on a new furnace or whole-house fan system. Cheaper fixes: A low-flow showerhead, faucet aerators, compact fluorescent bulbs, weatherstripping. Extra frugal points if you invest in a home-improvement item that generates a tax credit for next year.

13. Supermarket gift cards. At least one chain tacked on an additional 10% when I bought a $300 gift card. Does your store do this? Having the card with you will let you take advantage of manager’s specials or bonanzas in the dented-can bin.

14. Pamper your wheels. If you change your own oil, get a case of your car’s preferred brand (look for loss leaders at auto centers) and the filters to match. Stash replacement wiper blades, some windshield fluid, and any other odds and ends you might need this year. Check your tires; if they’re looking worn, start watching for sales. (The best price might be at the warehouse club you just joined.)

Readers: Got any ideas to share? How are you using your income tax refund, if any?

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  1. These are great ideas! I already have my emergency fund in place, otherwise that would be the first thing I’d put the money towards. Instead, I’m going to apply my refund towards my mortgage. I ran the scenario through a mortgage payment calculator and doing so will shave 8 months and $7,000 in interest off the mortgage. Even if I don’t remain in the house for the rest of my life, that’s a better return than I could get putting the money in any other kind of savings vehicle at this time.

  2. I’m just going to roll mine right into my IRA for this year.

  3. I have tried to pay my car insurance ahead, but it is not allowed! Six months is all they will take.

    When I was very young (in school), I used my tax refund to replenish staples in my wardrobe–panties, bras, shoes, new wardrobe items beyond underclothes that I did not make. My weekly pittance did not leave much wiggle room. Living in the South makes it possible for a warm-natured person to wear basically the same wardrobe all year. However, Spring was the season in which I bought clothing, mostly. Maybe this was not a frugal practice, but it was a boost to me and a reward for frugality sewing all year.

  4. Our tax refund was huge because we were blessed to adopt our daughter last year.
    We paid off our credit card debt (its amazing how much stuff we ended up needing for her, we were prepared for an infant not a toddler), bought our first share in a CSA, bought a zoo membership (pays for itself after 3 visits) saved a huge chunk (over 50% for our Ethiopian adoption), bought our daughter a few good quality wood toys that should last, saved money for a new mattress, and money for projects. New windshield, brakes, and big planter box so we can grow a garden next year.

  5. Catseye

    I’ll put it in my savings account/emergency fund. I’ve done this for several years now.
    I really like getting a federal tax refund. I’d rather they pay me than I pay them! ;o)

  6. It’s not really frugal but my refund went to the cost of my move. I’m moving across the country and so my money went to that. Last refund went to pay of my credit card.

    • Donna Freedman

      @Ali: It’s frugal if you’re paying cash for the move vs. putting it on a credit card. Good for you!

  7. Mollymouser

    We used part of our income tax refund to order 4 dual pane windows for our home ~ which we hope will help with energy efficiency and noise reduction. (We’d previously installed some dual pane windows, but skipped these windows due to the cost.)

    We also used part of our income tax refund to replace the carpeting in one of our bedrooms, to paint it, and we replaced two older, particle-board bookcases with two real wood ones (unfinished, but now they’re finished!).

    The rest goes into our Emergency Fund / Long-term savings.

  8. Ours is going to repair the gutters that were destroyed in the snowmaggedan of early 2010, ugh!

  9. Michele

    Buying a savings I bond

  10. So I should spend $5 on Candy, and the rest of it on a dentist visit? Good plan!

    • Donna Freedman

      @Lizzy: If you use coupons, you should only have to spend about $3 on candy. The extra $2 could go toward bus fare to the dentist’s office.

    • Donna Freedman

      @MutantSuperModel: Summer camp for the kids, or for the parents?

  11. I had to pay taxes this year which is fine with me since I was able to get more money with every paycheck throughout the year.

    good tips on the how to use the refund.

    The only thing about the social media deals are some of the places listed aren’t that good, so make sure you check reviews of them if possible before purchasing.

  12. These are all great tips, especially because I think that a lot of people use their refund for stuff they don’t need; then they end up with not enough money for the stuff they do need. I used most of my tax refund to pay off some credit card debt, and I used the rest for my Roth IRA. I used to think I didn’t need to worry about setting up a retirement fund until I was older, but with Social Security being the way it is I figured it’s better to be prepared.

    • Donna Freedman

      @Neurotic Workaholic: Good for you for taking care of both outstanding debt and far-off retirement. Now is exactly the time to set up a retirement fund — compound interest is your friend.
      Thanks for reading, and for leaving a comment.

  13. 10% blow on anything?! What?!

    I put 100% of mine to prepay my utilities. I’ve done this in the past on auto insurance. Now we set aside a monthly amount in savings to have a lump sum for the prepay next year! All I got was $25 credit but in this economy I’ll take it.

  14. lostAnnfound

    No refund this year. We had to pay some to both state & federal, but it wasn’t too bad considering I don’t pay taxes throughout the year. My husband usually has extra taken out of his paycheck to help cover my taxes, but he lost his job just a year ago and has been working part-time since September. I guess I should start pay quarterly taxes this year, just in case.

    • Donna Freedman

      @LostAnnFound: Quarterlies aren’t fun, but if you’re self-employed (are you?) better see to it that they’re paid.
      No refund, but at least you didn’t owe taxes.
      Thanks for reading, and for leaving a comment.

  15. @Donna- almost all of the moving stuff is going to be cash. The only thing that won’t be will be a one night hotel stay.

    But after paying off my card and building up savings I had a situation where I got a “want” and then was hit but a bunch of “needs” and I charged things and decided to use the cash to pay for the move rather than paying off the credit card.

    I thought I was doing really well, I have 1 credit card with a rather low limit. But I found out my credit is “thin” so I’ve gotten two more credit cards with tiny limits and just charging and paying off each month to get my credit score up.

  16. Prepaying insurance and buying gift cards for essentials are great ideas I hadn’t thought of – I’ll keep them in mind for my next windfall. Thanks, Donna!

  17. I have to admit that we’re using ours for a one-time blow out trip to Disney for our kids. We have a food stockpile, only mortgage debt, a decent retirement account and are current with all our health care needs. So, we’re taking the money and using it on much anticipated vacation.

    • Donna Freedman

      @Jenny: It sounds to me that you’re doing the right thing. Just remember: Buy your souvenirs outside of Disney. The same T-shirts and stuffed animals, at lower prices.
      Have fun.

  18. Donna, you are right. I’ve been hitting up the local thrift store on half price day for my Mickey stuff.

  19. Every year the first priority with tax return money is to pay one extra monthly payment to the principal on our house mortgage. We expect to pay off our 30 year mortgage 7 years early because of this. After that my husband and I will have a little fun money each and the rest will go into the house repair bank account.

  20. We are saving for a medium term goal which is a larger house so my mom can move in with us. It’s been extremely un-gratifying so far as the purchase is not imminent. Man is it 1000% tougher to be motivated to save vs pay off debt.

    Debt repayment gives me a sense of instant gratification that savings just doesn’t. I can see why so many people have a hard time saving.

  21. Katie Lou

    I got a smallish refund this year and I was all excitied to get my emergency fund back up to where I wanted it. Except… my cat came home limping and needed surgery. Luckily the refund pretty much covered that cost. Oh well, now I have a cone headed buddy for the next couple of weeks until his cast comes off.

  22. Entlzha

    I also got a smallish refund. I split it between the emergency fund, the HSA, and paying off the last of my credit card debt next month. And I agree with using a small percentage for something fun. I put 10% toward a summer vacation I have planned. Although I think that paying off the debt might qualify as my ‘fun’ item since it tickles me so much! 🙂

  23. I am using the combined resources of state and federal returns (a very modest amount even combined but a bonus none the less) for a solid used car & 6 months to a year insurance, licensing and tags. Last car was a lemon. A very much anticipated and carefully planned for 3 day anniversary trip for the grown-ups, paying off some medical bills not covered by insurance, re-seeding our emergency fund, son’s birthday and next school year expenses and some knitting classes for me. A hobby that will begin to pay for it’s self as my burning ambition is to get so good I can knit socks for the whole family. I have already started to knit washclothes, my beginner project, for our own personal use. If anyone has any suggestions on how I can pinch the pennies out if this puppy any more I would welcome them! I think I have done pretty good budgeting that but am always wiling to learn AND save more!


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