As of the latest reported tax data from the IRS, the average American can expect to receive a tax refund of nearly three thousand dollars. For many, three thousand dollars is a windfall and you might be tempted to spend it in less than responsible ways.
Fortunately, there are plenty of ways you can smartly use that refund to help improve your financial situation.
Pay Down Debt
If you are carrying debt, especially high interest credit card debt, consider taking a small part of your refund and paying down your credit card debt. Credit card debt interest is typically in double digits and any sizable balance can have an extremely negative effect on your finances. Paying off credit card debt can often take many years, especially if you are charged high interest rates, and being able to pay off a large amount can help lighten that burden.
Before you consider investing the money in the stock market, invest it in yourself and your future by paying down debt. It won’t be as exciting as investing in shares of Apple, but you’re going to get a better return.
If you’re fortunate not to have any high interest debt, put some of that money away for a rainy day. A lot of people like to get refunds because they see it as forced savings, not lending money to Uncle Sam for free, and in that respect it’s a reasonable strategy. With interest rates on savings accounts so low, you aren’t surrendering too much through over withholding.
That said, you have to save the money after you get it for the strategy to make any sense! If you don’t have an emergency fund, use some of your refund to start one. If you haven’t started a house fund, and intend to buy one in the future, peel off a little for that. Start thinking about your future savings goals and start saving for them today.
Once you’ve saved a little for a rainy day and paid down your debt, think about ways for that money to grow. That could be investing in the stock market, using tools like mutual funds and ETFs. It could be increasing your 401(k) contributions at work and covering the difference with your tax refund. It could simply be putting it in certificates of deposit, which isn’t technically investing, or some other safe vehicle that accrues interest over time. Whatever it is, take some time to research your options and put your money wherever it makes sense.
Finally, and most importantly, treat yourself. If you’ve done the responsible thing and paid down debt, put some towards savings, and even invested a bit, take the rest and do something fun. It’s important to treat yourself every once and a while so that you can continue being responsible when the time calls for it. Finances are a lot like diets. You need cheat days to keep you sane and on track.
Whatever you decide to do, you’ll be fine as long as you have a plan and stick with it.