Ten Great Ways to Spend an Income Tax Refund
*This publication is only intended to be used for general informational purposes. Consult a tax professional for the most current data and/or personal advice.
Expecting a substantial income tax refund this year? If so, you are in the majority; over 80 percent of Americans get money back at the end of the tax year, with the average refund being close to $2,900. Rather than having those precious dollars being absorbed into your normal spending routine, get the most out of your cash.
- Pay down high interest loans and lines of credit. With average annual interest rates for credit cards and personal loans hovering around fifteen percent, paying off that credit card before making other investment decisions makes good sense.
- Fund Your Retirement Account. If you haven’t invested in a retirement account, seriously consider making a contribution to a retirement account right away.
- Invest it. Instead of just working for money, let money work for you. If you invested one lump sum of $1,500 in the stock market, over thirty years, assuming a 12 percent return, you’d have $ 53,924! (Of course, do your research first before making any investment decisions and talk to licensed investment professionals)
- Open an emergency account. Most Americans don’t have money set aside for those financial emergencies that always seem to happen when there is no cash in the coffer. A large tax refund is a great start for an emergency account. Experts recommend that it should eventually total between three to six months’ worth of essential living expenses.
- Pay for repairs. Maintaining expensive possessions now will result in dollars saved tomorrow. Use the money to repair that leaky roof before it develops into a bigger problem; replace those dangerous bald tires with new, safe ones.
- Start a personal endowment. Investing in your emotional, physical, intellectual, and career growth is a wise use of money. Whether it’s paying for a gym membership or a cooking class, you’ll feel effects of this type of investment fast.
- Make an extra home mortgage payment (or two). Though you won’t feel the benefit immediately, doubling up on a mortgage payment now can save you months of mortgage payments later.
- Donate to a charity. Giving back to the community is a wonderful way of supporting a cause that you are passionate about. Even better – in many cases at least a portion of your donation is tax-deductible too.
- Open a College Savings Plan for your child. A four-year, out-of-state college education can cost over $100,000. Save for your child’s college education with a college saving plan. For the most part, withdrawals are completely tax-free when used for higher education purposes. Talk to a licensed investment professional about your different options.
- Plan a vacation. If you are in a fluid financial position, and can truly afford a bit of luxury, do something you’ve been dreaming of. Money is to be enjoyed as well as earned, saved, and invested. Go ahead. Book that cruise!
Although all the preceding ideas are excellent uses for a lump-sum amount of cash, remember that instead of planning for a refund, it could be more beneficial to come out even. A tax refund is an interest-free loan to the government, and money that is not in your pocket every month. If you have been getting a refund back each year, consider changing your withholding exemptions so less tax is withheld from each paycheck. While a tax refund may feel like a gift from Uncle Sam, it’s not—it’s money that you have overpaid on your income taxes. That said, some people use this as a form of saving.
Revised February 2018.