Every year, you look forward to getting your tax refund after filing. Typically, the average refund is around $3,000, depending on the state in which you reside. For example, in Texas, residents received an average refund of $3,191 in 2019, and in New Jersey, residents received an average of $2,848.

A tax refund can be a nice chunk of change no matter where you live. You could use that money to go on a shopping spree or buy an entirely new entertainment console for binging Netflix. However, spending it all in one fell swoop or putting it towards wants might not be the smartest way to spend your tax refund.

You have a pretty good idea of how not to spend your tax refund – but what should you put it towards instead? Here are some of the best ideas for using your 2020 tax refund in 2021.

1. Put It Toward Your Retirement Fund

A woman looks at her computer as she determines how much of her tax refund she will add to her retirement account
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You’re supposed to put 10% to 15% of your income toward your retirement starting when you enter the workforce. If you haven’t been saving that much and you’d like to jumpstart your retirement or have always been smart when it comes to stashing away, you can put your refund into your retirement account. The sooner you do it, the better so that it has time to gain as much interest as possible.

2. Pay Off Credit Card Debt

A man looks at his credit card and his phone as he prepares to put his tax refund towards paying down his credit card debt
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When it comes to spending your tax refund, using it to pay off credit card debt is a great option. If you’re an average American, you have around $6,194 in credit card debt. However, many Americans carry much more credit card debt. The interest rates may be as high as 17% or more, which means that you’re paying off mostly interest every month. Putting a good chunk of your tax refund money towards your debt can take your balance down and improve your credit score at the same time since you’re lowering your [credit utilization ratio](https://www.moneygeek.com/credit-cards/advice/credit-utilization-ratio/).

3. Pay Off Student Loan Debt

A young man views his student loan invoice as he prepares to use his tax return to make a large payment towards paying off his student loan
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Just like credit cards, student loans may be charging you high interest on your loan amount every month. If you’re able to put some or all of your tax refund towards this debt, again, you could increase your credit score and feel much more secure with your finances.

4. Put It Toward a Down Payment

A young couple sits on the porch of their first home. They used tax refund money as their down payment.
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If you’re wondering what to do with your tax refund, you could contribute some money to an account you can use to save up for a down payment on a home. If you can secure a Federal Housing Administration loan, you may only need to put down 3.5% on a home to get a mortgage loan. You may only need to have around $3,000 saved up if you live in a state where homes can be bought for about $100,000.

5. Upgrade Your Insurance Coverage

A woman is driving a car with her baby in the backseat. She is smiling because she was able to afford better car insurance after receiving her tax refund
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A wise use of your tax refund could be purchasing better car insurance or homeowners insurance to protect yourself and your belongings.

For instance, let’s say you have the minimum bodily injury limit, or liability, coverage of $15,000 per person for your car insurance. However, you’ve never felt comfortable driving around with such a low minimum, considering how high medical expenses are these days. You could always purchase more coverage with your tax refund.

If you rent or own a home, perhaps now that the world is opening back up, you’re entertaining people in your home again. To protect yourself and your property, you want to ensure you have good renters insurance or homeowners insurance. You could pay for that extra coverage with your tax refund.

6. Contribute to Your Emergency Fund

A couple looks at their computer while calculating how much of their tax return they will be able to contribute to their emergency savings
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It’s always a good idea to have at least six months’ worth of expenses saved in an emergency fund just in case you have an unexpected medical emergency or you lose your job. When deciding what to do with your tax refund, consider contributing some to your emergency fund. If your emergency fund is in a high-interest savings account, you could make money on it while you sleep.

7. Invest It in Your Business

A small business owner smiles while looking at his computer tablet and seeing the amount of money he will be able to use from his tax refund to put toward his business
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If you run your own business, you could take your tax refund and put it back into your business. You could purchase new office supplies you need, hire a contractor to do some small jobs or pay off a business loan. Then, you can reach your business goals that much quicker.

8. Invest the Money

Two people are shown from the shoulders down. They are looking at investment charts and a computer to decide how much of a tax refund to put towards investments
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You could invest a few thousand dollars from your tax refund and watch it grow over the next several years. Just keep in mind that some investments are riskier than others, and there is a genuine possibility that you could lose the money if you don’t make the right moves.

For example, you could invest in stocks, mutual funds, bonds or real estate. If you invest in blue-chip stocks from companies that are pretty much guaranteed to do well, then you’re taking much less of a risk than if you were to invest in a startup that hasn’t proven itself yet. The shares for blue-chip stocks could be higher — Amazon is at $3,110.87 per share, for instance — but there is a much better chance you’ll make money.

Another way to take less of a risk when it comes to real estate is to invest a small amount into a REIT, a real estate investment trust. These are companies that own and operate real estate that produces income. Sites like Fundrise and DiversyFund let you invest in real estate with as little as $500.

9. Purchase Life Insurance

An older couple looks at life insurance policies online to determine which one they should purchase with their tax refund
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If you don't already have it, [shopping for life insurance](https://www.moneygeek.com/insurance/life/) could be one of the smartest ways to spend your tax refund. When you pass away, your family could use the life insurance money to pay off your debt, cover their bills, pay the mortgage and much more. When you purchase it, you’re protecting your family and ensuring that no matter what happens, they won’t have to worry once you’re gone.

10. Pay off Your Car

A woman drives with a smile on her face because she has just used her tax refund to pay off her car loan
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Are you making expensive car payments every month? The average monthly car payment for a used vehicle is $397, and the average for a new car is $568. By putting your tax refund towards your car payment, you will avoid interest and feel more secure that you finally own your vehicle.

Getting Your Tax Refund

Remember: If you want to get your tax refund as fast as possible, file electronically and select the direct deposit option. According to the IRS, if you file electronically, you should receive your refund in less than three weeks. Once you get it, you can spend it however you choose and start securing your financial future.

About the Author

Kylie Ora Lobell is a writer for MoneyGeek. She has over 10 years of experience writing in the personal finance, legal and business space for publications and brands like Legal Management Magazine, LegalZoom, Forbes, EMC, IBM, Dell, Mastercard, Visa and NCR. Her bylines include The Washington Post, The Los Angeles Times, The Jewish Journal of Los Angeles, New York Magazine and Time Out NY/LA. Her website is KylieOraLobell.com.