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If you're among the 80% of taxpayers who will receive a tax refund this year, here's what to do with your tax refund, according to experts.
According to the IRS, the average tax refund payment was more than $2,753. That's a lot of money that you can put to good use.
While you can probably think of many places to cash your valuable refund check today, you may not be thrilled with the choice tomorrow.
Instead of spending all your money frivolously, why not use it to increase your profits?
Invest this money in one of the ideas listed below and you can secure your future self with a thank you. You might even have some fun along the way. Also, be sure to check them out Three things NOT to do with your tax refund at the end of the article.
Here are some of the best ways to put your tax refund to good use this year:
How to spend your tax refund
1. Pay off high-interest debt
While it's certainly not the most exciting option on this list, paying off (or paying off) that debt when you receive your tax return is one of the best financial moves you can make if you have credit card debt.
Free yourself from the shackles of high interest charges and pay off at least part of your debts. It can also help improve your credit score, open doors, and secure your financial future.
They say that actions build confidence and courage – taking this first step towards reducing your debt can set you in a positive direction financially.
2. Build your emergency fund
Your car is broken; Your child became ill; The neighborhood kids broke your window while playing baseball. Accidents happen all the time, so make sure you are prepared!
You may not be able to accurately plan for every expense that will arise, but you can expect the unexpected and prepare for the worst. Unexpected expenses don't have to devastate your finances.
You will be amazed at how free you will feel knowing that you are ready for the random blows that life throws your way.
That's why using your tax refund to replenish an emergency fund is a smart move!
3. Open a high-interest savings account
If you're not sure exactly how to spend your tax refund, or simply want to stash it away for safekeeping (or for your emergency savings), an online savings account is the right choice.
Online banks can offer the most competitive rates because they don't have branches to support them. For this reason, you will find much higher interest rates at an online bank than at a traditional bank.
Whether you're using the account to house your emergency fund or simply to establish sound financial habits by saving money, you should definitely consider saving online. Check out our list of the best online savings accounts or this small selection here:
4. Maximize your Roth IRA
The value of a Roth IRA cannot be overstated. A Roth IRA is funded with after-tax dollars, meaning your distributions won't be taxed as long as you follow the rules. You will also not be penalized for withdrawals.
Given the amazing benefits that Roth IRAs offer, if you qualify for them, you should do your best to make the most of them every year.
But even small amounts can work wonders in the long run. So take the tax refund check and send us whatever you can!
Our top choice for a Roth IRA is Charles Schwab, where you can invest commission-free!
5. Start investing with a robo-advisor
If your debts are paid off and your emergency fund is already filled, you can have fun with your refund by investing it on an online platform.
Whether you're new to the investing game or have a few trades under your belt, a robo-advisor can provide you with simplified, affordable trading and resources.
Wealthfront is one of our favorites because it offers dozens of customized portfolios and does all the work for you.
Wealthfront then automates your investments and rebalances your allocations for you.
6. Apply your refund to your future tax bill
Are you independent? Freelancer or contract worker? If you need to make estimated quarterly tax payments, you can apply your refund directly to those future obligations.
Doing this now will help reduce tax stress in the future. It will also help free up future income for other financial goals.
Instead of being surprised by these expenses, you can pay for them with your tax refund, reducing the financial burden and administrative burden of working these costs into your budget later.
7. Make an additional mortgage payment on the principal amount only
If you like saving thousands of dollars in interest, making extra payments on your mortgage, especially ones that only cover the principal balance, is the easiest way to do this aside from paying off your credit card debt.
Make sure your mortgage lender doesn't charge a prepayment penalty. If not, send the check (or make the online payment) today.
Every little bit of extra money you spend on paying off principal helps and can potentially shorten the life of your mortgage by months or even years. Your tax refund is a good starting point to accelerate your mortgage repayment.
8. Invest in your home
Home improvements are a great way to increase the value of your home. And if there's a project you've always wanted to complete but didn't have the money for, finally crossing it off your to-do list will increase your overall satisfaction.
Simple, inexpensive changes like paint color, faucets and lighting fixtures can make a big difference. Additionally, if you take on the challenge of making these upgrades or repairs yourself, you'll expand your skills while saving money.
9. Invest in yourself
Never underestimate the opportunity to invest in your health, education or relationships. Investing in yourself has the potential for the highest return on investment.
From enrolling in foreign language courses to getting back in shape to rekindling that romantic spark, a small investment in yourself can literally benefit you for years to come.
One of the best long-term investments you can make is improving your marketability in the professional world. Whether you're going back to school, looking for professional development opportunities, or looking to improve your skills, you won't regret putting money into your career goals.
10. Give it as a gift
One of the most rewarding ways to spend your tax refund money is to donate it to a cause you care about.
If you don't have a specific organization in mind, you can find numerous legitimate and worthwhile giving causes with a little research.
You'll feel great knowing your money is making a difference in people's lives, and as an added bonus, you'll be working preemptively come tax season next year, since your donation could result in a deduction one year.
If you don't know where to donate it, you can even think about starting a Donor Advised Fund (DAF).
11. Have (a little) fun
Although it is ideal to worry about the above items on this list instead of having fun, this is not realistic. To avoid burnout or resentment, try dedicating a small portion of your tax return to that new gadget you've been longing for, a nice meal out, or another purchase made for pure pleasure.
Although you shouldn't invest all of your winnings in fun and frivolous activities, you can wisely put some of it aside for your free time. In other words, you can treat yourself without overdoing it.
You definitely won't regret taking a little time off as long as you continue to pursue your other financial goals well.
3 things to avoid on your tax refund
We'll tell you what to do with your tax refund. Now let's talk about what NOT to do with your tax refund. We see these problems happen every year and we really want you to avoid them!
Don't spend your tax refund before you receive it
Too many taxpayers use tax prepayment loans every year – as early as December. This allows people to receive an advance on the refund, which is then paid back when they file their taxes.
But this is a stupid waste of money and financially risky. First, most of these loans come with fees, charges, or even higher tax preparation fees. This is risky because many first-time applicants do this before they have received all the documents and end up missing something.
This can actually result in a tax refund being delayed or even a later audit.
Considering that according to the IRS refund schedule, a tax return only takes 21 days to process on average, you should just be patient and file the tax return at a normal time. Even better, plan ahead to avoid getting a big refund.
Avoid impulse purchases
It can feel great when a lot of money hits your bank account all at once. But then human nature kicks in and you feel the urge to spend the money on something you've always wanted. It's hard to shake that feeling, but it's so much better to invest your tax refund than to waste it on impulse purchases that you'll never remember in five months.
Continue receiving a large tax refund
While the average refund is nearly $3,000, many people don't realize that a tax refund is simply a refund of additional money you paid to the IRS throughout the year.
Instead of $3,000 at tax time, you could actually get $250 more in your paycheck every month! If you're paid biweekly (like most Americans), you might get an extra $115 per paycheck. Seriously!
If you regularly receive large refunds, it may make sense to adjust your W4 withholding to better balance your taxes. This can result in you receiving more money with each paycheck and a smaller refund when you file your taxes.
What are you planning to do with your tax refund this year?
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