What To Do With Your Tax Refund
Getting a check in the mail or automatic deposit from the federal government after you submit your tax return is a great opportunity to whip your finances into shape. Don’t let that money burn a hole in your pocket. Use these tips to make the most of your tax refund.
What To Do With Your Income Tax Refund Money
It’s that time of the year again. Uncle Sam has come to collect taxes, but you may get a refund if your taxes are automatically deducted from your paycheck every week or month. That’s great news for millions of Americans.
The average tax refund for 2022 is up to $3,226 per household, marking a dramatic increase from the year before. In all, the Internal Revenue Service issued over $355 million in tax refunds for the 2021 tax year.
You have lots of options when it comes to spending your tax refund. You could take a vacation, buy a new appliance or go on a shopping spree. But you need to think about how these purchases will affect your finances down the line. Taking a vacation may give you some fun memories, but it won’t help you save for retirement or build wealth.
Here are some of the best ways to put this money to good use:
Create an Emergency Fund
You don’t want to leave your finances vulnerable in case of an emergency. Life is full of potential pitfalls and accidents that could derail your finances down the line. You may get sick and have medical bills, experience job loss or have to pay for repairs to your home out of pocket if it’s not covered by insurance.
In today’s increasingly unpredictable world, consider creating a financial emergency fund. It’s best to have at least three months’ worth of living expenses in a savings account just in case things take a turn for the worse. If you don’t have an emergency fund, you risk going further into debt when disaster strikes.
Pay Off High-Interest Debt
Debt will only hold you back financially, so it’s best to get out of debt or get rid of as much of it as you can while you have some extra money in your pocket. All debts come with interest, which means you’ll only have to pay more the longer it takes you to pay off the debt.
Put a large chunk of your refund towards paying off any debts you still owe, including credit card debts or student loans. If you have more than one form of debt, make sure you put all your money towards the debt with the highest interest rate. Credit cards tend to come with high interest rates, so those are usually the first priority. If the interest rate is adjustable and subject to change, try to pay off as much of the principal while interest rates are low.
Save for Retirement
Many Americans do not have enough money saved for retirement. Social security payments are increasing to make up for the increase in the cost of living, but inflation will make it harder for many people to retire.
Now is the time to jumpstart your retirement savings plan. Even if you don’t have a 401(k) plan through your employer, you can always set up an individual retirement account (IRA) to start your retirement savings. When invested, this money will increase in value over time to help keep up with inflation and increased cost of living.
Lock in a Life Insurance Policy
Locking in a life insurance policy is a great way to leave behind funds for your loved ones after you pass away. Monthly premiums are based on your age and health, so the younger you are when you take out the policy, the lower the premiums will be. Waiting until you’re older can leave you stuck paying higher premiums.
You will need to continue paying your premium every month to keep your policy active – even after your tax refund dries up. Adjust your budget accordingly to make room for your monthly life insurance premium. Consider putting your refund in a separate account and linking it to your life insurance bill to keep this money earmarked for your life insurance policy.
Invest in High-Yield Returns
If you’re new to investing, it’s never too late to get started. Put your tax refund towards reliable financial investments that will grow over time. You don’t have to be a financial expert or play the stock market to grow your savings.
Consider putting your money in mutual funds, exchange-traded funds or automated accounts that distribute your savings across a range of popular investments. This diversifies your risk while helping you increase your savings over time.
It's not every day that you get a large check from the government. Regardless of how much your return is this year, use your money in practical ways that help improve your long-term financial position.