Spring marks new beginnings, and a tax refund can be the perfect start to achieving your financial goals. Even though tax season is over, it’s still possible to make the most of the extra cash in your pocket.
With the average tax refund for the 2022 tax year being almost $3,200, the possibilities of what you can do with that extra money are endless. While the thought of splurging on a luxurious item or taking a trip to an exotic location may seem tempting, there are smarter ways to use your tax refund that can help you achieve your financial goals. So, let’s dive into some practical and personal strategies to help you maximize your tax refund!
Pay off high-interest debt
One of the best ways to use your tax refund is to pay off high-interest debt, such as credit card debt or personal loans. High-interest debt can quickly accumulate and be difficult to pay off, so using your tax refund to pay down this debt can save you money in interest fees over time. According to a study by MoneyGeek.com, in 2022, the average interest rate on credit cards is 19.49%. Carrying a balance of $5,000 on a credit card with a 19.49% interest rate would result in about $1,000 in interest charges over the course of a year.
Build your emergency fund
If you don’t have an emergency fund, using your tax refund to start one is a smart move. An emergency fund is a savings account that can cover unexpected expenses, such as medical bills or car repairs. Financial experts recommend having at least three to six months’ worth of living expenses saved in an emergency fund. A survey by Bankrate found that 28% of Americans have no emergency savings at all. In the same survey, only 23% of Americans had enough emergency savings to cover six months’ worth of expenses.
Invest in your future
Investing your tax refund in your future is another smart way to use your money. Consider opening an IRA or investing in a mutual fund or index fund. Investing your tax refund can help you build wealth over time and can provide a source of income in retirement. According to a study by NerdWallet, a $1,000 investment in the S&P 500 index 30 years ago would be worth over $10,000 today. The same study found that over a 30-year period, the average annual return for the S&P 500 was 10.8%.
Save for a specific goal
If you have a specific financial goal in mind, such as saving for a down payment on a house or a child’s college education, using your tax refund to start or add to a savings account can help you reach that goal faster. Setting aside your tax refund for a specific goal can help you stay motivated and on track towards achieving that goal. A survey by Bankrate found that the most common financial goal for Americans is saving for retirement, followed by paying off debt and saving for emergencies. In the same survey, only 20% of Americans reported having a specific savings goal in mind.
Upgrade your skills
Investing in your education or professional development can pay off in the long run. Consider using your tax refund to take a course or attend a conference to help you advance your career. According to a new analysis by the Burnin Glass Institute, 41% of all jobs in the US require some form of postsecondary education or training beyond high school. College graduates will earn, on average, $1.2 million more over their lifetime than workers with only a high school diploma.
While it may be tempting to use your tax refund for a splurge purchase or a vacation, there are smarter ways to use your money that can help you achieve your financial goals. Paying off high-interest debt, building your emergency fund, investing in your future, saving for a specific goal, and upgrading your skills are all ways to use your tax refund that can provide long-term benefits. By making smart choices with your tax refund, you can maximize your money and take steps toward achieving financial security.