If you’re among the estimated 110 million Americans who will receive a federal tax refund this year in the average amount of $2,840, chances are you will spend or invest some, if not all of it.
But the question becomes just how to handle the extra money, because the options are copious. One thing to consider up front is if you have been getting large refunds from the Internal Revenue Service, you might want to think about adjusting your federal income tax withholding allowances. After all, this money belongs to you and you have essentially been loaning it to the government interest-free each year.
According to tax experts, whatever you do receive should largely be allocated judiciously, with thoughts about your future in mind.
Sock some away
One way to begin laying aside some of your wealth is by starting or increasing your emergency fund. Without an emergency fund, just one major expense surprise can send you into a debt spiral, Money Crashers warns. Many experts say your fund should contain about six to eight months of savings in an easily accessible interest-bearing account (such as a savings or money market account). Otherwise, socking that much money away could take months, even years, if you’re just taking a little bit out of each paycheck. Your tax refund can be an ideal way to make a significant deposit.
Put a dent in debt
Another approach is to use your refund to reduce or eliminate any high-interest debt that you’re carrying, Money Crashers says. Put your refund to work by starting a debt elimination/reduction program. Allocate some of your refund to paying title loans, debt consolidation loans, high-interest private student loans, auto loans or credit cards.
Or, it might be the right time to refinance your mortgage. Use the refund to help pay closing costs and fees, and potentially save thousands annually in mortgage interest.
If you’re okay with your mortgage rate, take a look around the house. Do you need a new roof? Is your kitchen outdated? Could new energy-efficient appliances lower utility bills? Home improvement projects can immediately increase the value of your property while simultaneously making your home more comfortable.
Put your money to work
Depending on your income level, goals, age, and whether you have already fully funded your tax sheltered accounts, using your tax refund to get a head start on a Traditional IRA or a Roth IRA can be a great move. This may result in your three-digit tax refund growing into a four-digit addition over the course of several years.
If you’ve already contributed the maximum to your tax-sheltered accounts, consider opening an investment account that is overseen by a wealth advisor.
You can also invest in yourself by taking steps to further your career. Money Talks News suggests upgrading your wardrobe, buying equipment you need, and/or enrolling in job-related training or coursework. Take out subscriptions to publications that cater to your employment field, or are designed for professionals, like The New York Times. Take it a step further and hire a career coach whose advice will likely prove invaluable.
Think of those in need
Sure, you can take some of the money and spend it on yourself. Why not? You earned it. But, your refund also gives you a chance to give a little back. Contributing to charity is an excellent use of money and provides a huge societal benefit.
Although the returns on your investment may not be as immediate or measurable as investing in the financial markets, giving to charity will benefit your community in a major way, and you can claim the tax deduction, too.
Resources: Internal Revenue Service, Money Crashers, Money Talks News