Eight Great Ways to Spend an Income Tax Refund
Expecting a substantial income tax refund this year? If so, you are in the majority; over 80% of Americans get money back at the end of the tax year, with the average refund being close to $2,900. Rather than allowing those precious dollars 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 15%, 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. Always, 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 massive 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. Check out the Name It Save It savings account now for a more liquid option for your funds!
- 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 more significant problem; replace those dangerous bald tires with new, safe ones.
- Make an extra home mortgage payment (or two). Thanks to the magic of compound interest, doubling up on a mortgage payment now can save you months of mortgage payments later.
- Open a college fund for your child. A four-year, out-of-state college education can cost over $100,000. For the most part, withdrawals are tax-free when used for higher education purposes. A Name It Save It account or Education Savings Account is an excellent solution for a college fund.
- 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 previous 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.