Now that tax season is over, you’re probably looking forward to receiving your tax refund. In 2022, over 96 million people were refunded with an average payment of $3,039.
That’s no small chunk of change, and the last thing you want to do is absorb it by making small purchases over time. A windfall like a refund is a great opportunity to set yourself up for a better financial future. While there’s nothing wrong with spending some on a little fun, consider using the money wisely and get ahead financially. Need some ideas? We’ve put together a list of 8 smart things you can do with your tax refund.
1. Build an Emergency Fund
As the adage says, “Anything that can go wrong will go wrong.” Build a little cushion against Murphy’s Law with an emergency fund. The money in this savings account is tucked away for the day when the unexpected happens. Having the funds to address the unexpected can make a stressful situation much easier.
How much should you save? Most financial experts recommend saving between 3-6 months’ worth of expenses. However, it’s always much better to have something rather than nothing so even socking away $500 is a great start. High-yield savings accounts are a great place to keep your money until you need it.
2. Pay Off Debt
Paying off debt can feel decidedly un-fun in the moment, but it can free you up to have more fun in the future. When you pay down debt, (especially the high interest kind) you’re freeing up more of your future income and creating greater flexibility for yourself down the road. If you’re not sure where to start, consider these two popular strategies for tackling debt:
- Avalanche Method: This involves paying off your debt with the highest interest rate first, so you minimize the amount of interest you pay over time and save money in the long run.
- Debt Snowball Method: This involves paying off your debts in order from smallest to largest balance, using the money you save to apply to bigger and bigger balances. This method gives you some momentum to keep paying down debt.
3. Fund Your Retirement
Opening a retirement account, or maxing out your yearly contributions, is a fantastic way to invest your refund. Depending on the type of account you have, your contributions can grow tax deferred and when it comes time to enjoy your golden years, you’ll have a healthy nest egg to rely on.
4. Invest In the Stock Market
Use your money to make more money! When you invest in the stock market, whether it’s through mutual funds, stocks, bonds, or ETFs, investing in the stock market allows you to take advantage of compound interest. A disciplined approach to investing, where you tuck away funds year after year, is a great way to achieve financial freedom.
5. Invest in Yourself
You are your greatest asset. Your education, talent, expertise, experience, and work ethic all influence your rate of return through improving your earning potential on the job market.
With more skills, you can expect bigger paychecks and greater job stability. Consider using your tax return to pay for training, tuition, or professional memberships that will yield dividends as you chart your career course.
6. Make an Extra Mortgage Payment
If you own a home, you can make an extra mortgage payment or two and get one step closer to actually owning your home. Paying an extra principal payment on your house builds equity. The more equity you have in your home, the more purchasing (or saving) power you have if you choose to sell down the road. Plus, paying down the principal on a home works like paying down debt. The sooner you pay off the loan amount, the less money you’ll spend on interest.
7. Make a Major Purchase
Maybe it’s time to upgrade your vehicle, buy more energy efficient kitchen appliances, or do some home improvements. Consider using your refund to start a savings account toward these major purchases. We recommend high-yield savings accounts to keep the savings separate from your everyday spending cash.
8. Donate To a Cause You’re Passionate About
Charitable giving makes a big impact in more ways than one. Your donation benefits those in need, improves your community, and gives you the satisfaction that you’re helping make the world a better place. Charitable giving also sets you up for a potential donation deduction on next year’s taxes. When you combine your giving with volunteer work (and maybe invite a loved one to tag along!) you’ve got a solid win-win strategy.
Contact Neely’s Accounting Services
Tax season may be over for 2023, but there’s always another one right around the corner. It’s never too early to begin preparing for tax season (including smart spending). Our Roanoke CPAs are ready to help you craft the perfect tax strategy for your personal or business taxes so you can get every deduction you deserve and make the most out of your refund every year. Contact us today to get started.