If you’re one of the 73.2% of American taxpayers to receive a tax refund this year, you’re probably anxiously awaiting that extra income to hit your bank account. Will you splurge? Fund a dream vacation? Eliminate some of your credit card debt?
According to data from the National Retail Foundation, 50% of Americans plan to put the money they got back from their tax refund toward their savings, while the second most common response was paying off debt. Before you blow through your refund, take a look at these 8 ways you can spend your tax refund instead—your wallet will thank you!
1. Free up your finances
Americans are currently carrying over a trillion dollars in credit card debt, approximately $5,700 per household. On top of paying off the balance, consumers often struggle to keep up with increasing interest rates that compound debt over time. While it may be challenging to exceed the minimum payment each month, your tax refund provides you with a great opportunity to make a more substantial payment to lower—or maybe even pay off—your existing debt.
2. Establish a backup plan
What would you do if your car broke down tomorrow and you didn’t have enough money in your checking account to cover the repairs? Or what if you suddenly lose your job but still need to cover your regular expenses? Life can bring many surprises (and challenges) your way, but being as prepared as possible can minimize the financial impact of whatever life throws your way.
Experts recommend saving three to six month’s worth of expenses in an emergency fund. Depending on how big your tax refund is, you may be able to build up a big portion of your emergency fund.
3. Boost your savings
Whether you want to plan a spontaneous vacation or finally swap out your college computer for a new one, having a savings account established can help you afford splurge-worthy and practical expenses alike.
4. Grow your wealth
Want to make the most of your tax refund? Consider trying your hand at investing! There are many ways you can go about this, but using your tax refund to jumpstart your investment fund is a great place to start. Some methods to invest include:
- Use a robo-advising platform
- Invest in a high-yield savings account
- Buy physical commodities like gold or jewelry
- Invest in real estate
Note: Choosing an investment avenue completely depends on your budget, goals, and preferences. Be sure to research your options to determine the best strategy for you.
5. Invest in your future
Another place you can invest your money is in your own future by contributing to a retirement fund. There are several retirement funds to choose from, some even provide tax benefits that can reduce your annual tax liability.
- Traditional IRAs and SEP IRAs are considered “tax-deferred,” meaning that consumers can build their fund with pre-taxed dollars and are only charged taxes when money is withdrawn.
- 401(k) plans are also tax-deferred until money is withdrawn or when an employee separates from the employer that provides their plan. Another benefit to 401(k)s is that some generous employers offer to match a certain percentage of employee contributions, which can be a great benefit for your eventual retirement.
6. Fund a positive experience
If the constant grind of the 9-5 is getting the best of you, why not use your tax refund to buy yourself some R&R? Go on a vacation, get a massage, or learn something you’ve always wanted to.
7. Build a fix-up fund
Another great way to use your tax refund is to make much-needed fixes around the house or to your car. It’s a very practical, possibly unexciting expense, but your day-to-day is sure to benefit from making these improvements that you might not have otherwise.
8. Pay it forward
If you have some money leftover from your refund, you might consider donating it to the charity of your choice. This is not only a great way to help others, but it’s also an impactful way to reduce your tax liability next year if you decide to itemize your deductions. Certain charitable donations qualify for a tax deduction; just be sure to verify with the organization that their donations qualify—and don’t forget to get a copy of your receipt!
Want to learn how you can boost your next tax refund? Sign up for your free tax consultation today!