In 2017, the average individual tax refund was $3,050 — a hefty chunk of change. If you’re receiving a refund, you may be wondering how to put it to the best use. While it might be tempting to splurge on a vacation or a shopping spree, there are better ways to spend your hard-earned dollars. Especially during tough economic times, a tax refund can be a great way to get a leg up financially. If you’re wondering how to flip your tax money, the best way to use tax refund can include paying off debt, boosting savings and investing in your future.
What is a tax return?
Employees who make over the standard deduction are required to file a tax return each year. A tax return catalogs all the income and individual has earned throughout the previous year, as well as any deductions and tax credits they may be eligible for. Most W2 employees have taxes taken out of their paycheck each period. These include state and federal income tax, as well as Social Security and Medicare payments. In many cases, a slightly larger amount of taxes than is owed is subtracted from their pay. After they file a tax return, many people are eligible for a tax refund.
7 ways your tax return could leave you better off
There are many things you can choose to spend your tax refund on, but not all of them will benefit your finances in the long run. If you receive a significant refund, it’s a good idea to make your money work for you rather than spending it on unnecessary purchases. By using your tax refund wisely, you’ll be able to better your financial circumstances and invest in the long term and change your life for the better.
1. Build an emergency fund
If you don’t yet have an emergency fund, that’s one of the first things you should put your tax refund toward. Building an emergency fund with a tax refund can help you to weather tough financial times and get back on your feet. It can also help you deal with emergency expenses without worry. Ideally, you should aim to have three to six months’ worth of expenses saved up in case you’re laid off or otherwise unable to work. High yield savings accounts are a great place to stash emergency savings, as they usually have much higher interest rates than traditional savings accounts.
2. Pay off high-interest debt
If you have high-interest debt, like a credit card balance or a personal loan, you can use your tax refund to help pay it off. High-interest debt can inhibit your ability to save money or build wealth and it accumulates additional interest over time. The sooner you eliminate debt the sooner you can start saving more money and improving your financial circumstances.
3. Start several savings buckets
If you have savings goals for particular purchases, like a wedding, vacation, new car or new home, starting several savings buckets can help you to visualize your goals and increase your savings. You can spread your tax refund out among these accounts, and commit to increasing your savings an additional amount each month.
4. Contribute to your retirement fund
It’s never a bad idea to put a windfall towards your retirement savings. Any money that you’re able to put away earlier in your career can dramatically increase by the time you reach retirement age. As a bonus, many types of retirement accounts are tax-advantaged, which means your money can work even harder. Whether you have a retirement account like a 401(k) that you contribute to through work, or a traditional or Roth IRA that you contribute to on your own, these accounts are a great place to stash a tax refund.
5. Invest in the stock market
If you’ve already maxed out your retirement contributions for the year, you might want to consider investing your tax refund in the stock market. You should open up an account with a brokerage to begin investing. If you have young children, consider opening up a 529 plan to save for college. You can also consider investing in peer-to-peer lending, real estate or even cryptocurrency. While no investment is risk-free, these options can be a great way to grow your money.
6. Contribute to a health savings account
A health savings account contribution is another good option when it comes to what to do with your tax refund. A health savings account, or HSA, is a tax-advantaged account that you can set up specifically to fund healthcare costs. You can use the money you save in an HSA to pay for qualified healthcare expenses. Once you turn 65, you can withdraw the funds to be used for any purpose, whether healthcare-related or not, making HSAs another attractive option when it comes to saving for retirement.
7. Invest in yourself
If you’re already in good financial shape, the best use of tax refund may be to invest in yourself. Giving yourself the necessary conditions to flourish personally and professionally can be incredibly valuable both in financial terms and in terms of your overall wellbeing.
Investing in yourself may look different for different people. You may consider using your tax return to pay for an advanced certification that can help you to level up at your job, or you may want to take a course in a subject that interests you to learn something new or improve your skills. You could further develop a hobby that you’ve been pursuing. You may want to spring for a weekly fitness class or invest your refund in a burgeoning side hustle.
Any investment you may in yourself will have both short- and long-term benefits, so it’s a great way to make the most of any extra money you get back from the government. If all your other financial ducks are in line, consider using the extra money to better some aspect of yourself — whether physical, personal or professional.
The bottom line
No matter what your tax refund looks like this year, it’s always a good idea to put your hard-earned cash to good use. While it might be tempting to spend the money on an unnecessary purchase, in the long run using the money to get in better financial shape will benefit you much more. Smart ways to use your tax refund include building up your savings, paying down debt, or investing in the future. A tax return can help you to get on the right track financially and ensure that your future is bright!
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How do you plan to spend your tax refund this year?