Photo: Flickr / Caroline on Crack
Last year, more than 64 million Americans received an average tax refund of $2,985, the IRS says.Where did they spend it? Everywhere. On everything from everyday expenses to vacations and big-ticket items like giant TVs, according to a National Retail Federation survey.
About two in five said they used the windfall to pay down debt.
As Stacy suggested, changing your tax withholding on your W-4 at work is one way to make sure you don’t waste a refund – you’ll get to keep more pay year-round instead of receiving a fat check from Uncle Sam.
But if you’re not sure what to do with your refund this year, here are some ideas that will make you richer – either by protecting your bottom line (from fees, interest charges, and frivolous spending) or by offering memorable new experiences…
- Pay down debt. Resist the urge to splurge. Use your refund to reduce high-interest balances. Not only does this cut down the interest charges and overall amount you owe, it may also improve your credit score by lowering your credit utilization ratio. And a better score can mean easier access to credit at better rates.
- Create an emergency fund. Living paycheck to paycheck often makes it difficult to do anything else – there’s never enough money to get ahead. Use your refund to build a financial cushion, ideally enough to cover at least three months of living expenses. That way, bills always get paid on time (no late fees), you never need a cash advance (no high-interest charges), and you can stock up on bargains at the grocery store. And the peace of mind: priceless. If you’ve already got that covered, set the money aside for something you know you’ll have to replace eventually, like your next car.
- Save on insurance. Speaking of vehicles, many car insurance companies offer a discount if you pay the six- or 12-month premium in full. Use a chunk of your refund to do that, and put the rest in a savings account so you can raise your deductible and lower your rate even more.
- Get a bigger refund next year. Our recent story Tax Hacks 2012: 3 Ways to Supercharge Your Refund offered ideas for both getting ahead and getting more from Uncle Sam next year. Make energy efficiency improvements to your home, pump up a retirement plan, or donate your old stuff to charity (to make way for the new) and your tax refund will be doing double duty.
- Start a business. Use your refund as seed money for a small side business or some classes in a skill or craft you’ve always wanted to learn. You could launch a website and sell your own arts and crafts, for instance, or start a garden and sell your extra fruits and veggies at a farmers market.
- Think big. If you’re going to blow the money, make it an event to remember – maybe take the family skydiving and get video of it – instead of frittering the refund away in forgettable ways. There are still ways to save, whether you want a traditional vacation for cheap or a getaway in the Italian countryside.
- Invest. Think for the long term instead of right now. You could start funding a 529 college savings plan, or open an individual retirement account for yourself – 10 per cent a year for two decades will turn your $2,000 refund into $13,000, and you can include future refunds to make it balloon even more. Just remember these 5 Things to Consider for a Less Taxing Retirement.
If you haven’t filed yet, make sure you get the biggest refund you can. Check out other stories from our tax hacks series, like 8 Easy-to-Miss Deductions.