What To Do With Your Tax Refund (10 Smart Tax Refund Investments)
Few things brighten up a dull, cold winter like a robust tax refund from Uncle Sam. In 2019, the average tax refund was $3,068—that’s a lot of extra dough. But before you go on a shopping spree or otherwise splurge with your refund, you might want to consider some other more responsible options like using that cash for home improvements or paying down your student loans. Don’t know what to do with a tax refund? We’ve got you covered.
Here are the 10 best ways to use a tax refund:
1. Pay Down Existing Debt
The average interest rate on new credit cards is just over 16%, and many credit card companies charge even higher rates. If you’re stuck with a credit card that has a high interest rate, one of the smartest ways to use your tax refund is to pay down your balance.
Interest fees from credit cards can snowball quickly into overwhelming debt. But by using your return as a lump sum to pay off the balance, you’ll reduce the financial and psychological burden of debt. You might even see your credit score rebound as a result of this, as well.
If you don’t have any debts sitting on your credit cards, you can pay down other financial obligations like your car loan or student loan, for example. Just make sure you know the terms of your loan so you don’t get hit with a prepayment penalty for paying early.
2. Build Up Your Emergency Fund
Ideally, three to six months' worth of income should be stashed away in an emergency fund at all times. But even if you can't swing that much, any emergency fund is better than none. Open a savings account if you don't have one and squirrel away at least part of your tax refund. You'll be glad you did when your car breaks down or an unexpected medical expense occurs.
3. Fund Your Individual Retirement Account
Even if you have a 401(k) through your employer, you can open your own individual retirement account (IRA) to supplement that plan. As long as you and your spouse have a modified adjusted growth income of less than $203,000, you can contribute up to $6,000 to a Roth IRA in 2019, or $6,500 if you're age 50 or older. This long-term money management is something you'll thank yourself for when you're older - especially when you consider experts recommend savings 10-12 times your current income to have a comfortable retirement.
4. Invest in Stocks
So, you're in a good place financially, with an emergency fund, a retirement fund, and little to no credit card debt. Maybe it's time to open a brokerage account and start investing with your tax refund! To do so, you can research on your own and invest in a tech startup or stock you believe has the potential for growth. Or, you can consult a financial professional to build a portfolio that matches your personal risk tolerance and financial goals.
You can also use Mint’s investment tracker feature to evaluate your stocks’ performance and tweak your strategy as time goes on. It’s smart to use the extra money from your return to take this calculated risk rather than taking money out of your savings or checking account.
5. Consider Buying Flood Insurance or Increasing Liability Coverage
Everyone’s heard of a rainy day fund — but what about when that rain continues to pour? With less than $1,000, you can purchase flood insurance from the National Flood Insurance Program if you live in a low to medium risk area. For under $500, you can buy an umbrella liability policy with $1 million in coverage beyond the limits of your car or homeowner's insurance. Sometimes, good money management means addressing the painful "what if" questions and using your tax return to protect your property and loved ones’ future.
6. Start a Savings Account for Something Big
If you want a great vacation or you’ve decided it's time to get serious about saving up the down payment for a house, open an account just for these big expenses and use your tax refund to kickstart your financial goal. Keeping the money separate from your regular bank accounts makes money management for major purchases easier and means you're less likely to dip into it for splurges.
7. Make Home Improvements
For under $1,000, you can make home improvements that will improve your daily quality of life. You could repaint one or more rooms, install new bathroom faucets, buy a programmable thermostat, add new landscaping, or de-junk and organize your garage. Not only will these enhancements make you feel a little happier at home, but they’ll also add value to your house if you decide to sell it later.
8. Donate to Charity
Receiving your tax refund gives you a perfect opportunity to donate money to a cause that's close to your heart. Be sure to save your receipts from donating, so you'll have the proper documentation if you itemize your deductions next year.
9. Replace an Inefficient Appliance
If you're still using an old refrigerator or washer-dryer combo that's energy inefficient, consider donating your old appliances to a charitable organization and buying a replacement that's greener. You'll enjoy a new appliance and your utility bills could be lower as a result.
10. Invest in Yourself
Perhaps you've wanted to take a college course or learn how to use Photoshop. Consider using your tax refund to make an investment in yourself. For example, you could learn a new skill that's relevant to your job or take cooking lessons to lower your going-out expenses.
Sure, you've probably had your eye on a pair of shoes or a couple of console games when your tax refund arrives but a wiser choice is to think beyond the lure of instant gratification.
FAQ: How to use a tax refund
How can I use my tax refund wisely?
Resist the urge to splurge. We constantly hear the phrase, “Treat yourself,” and while it’s not a bad idea to spend money on yourself for fun here and there, it’s not the smartest way to use a tax refund. Instead, take a hard look at your finances and figure out what to do with your tax refund so it improves your financial standing.
What should I use my tax return for?
The best way to use a tax refund depends on your personal financial goals. If you have outstanding debts, take care of those first. If your emergency fund is looking a little low, top up the account with all or part of your refund. And if you’ve covered all your financial bases, consider donating the funds from your return or investing in promising stocks.
Where can I invest my tax refund?
If you’re curious about how to invest a tax return, the best place to start is by doing your own research. Stick to simple investments before taking on a complicated portfolio by yourself. And remember, investing in stocks is making a calculated risk - never invest money you can’t afford to lose.