With Tax Day approaching, it’s now the season for receiving as millions of Americans are anticipating refund checks (if they haven’t gotten them already). Uncle Sam will pay out some $300 billion in refunds to about 66% of taxpayers, according to a study from the National Retail Federation. While recent surveys, like ones from the NRF and Capital One, found that most taxpayers intend to save this year’s refund, there are a handful of ways someone can put it to use. Here are some of those ways.
5 Ways to Use Your Tax Refund
Build your savings account
Saving is a lofty goal, but without a plan it’s a goal that can be hard to start. Having a savings account can help, but what works best is having accounts tailored to specific goals and purposes. For example, you can set up an account for emergencies, vacations, future educational expenses or other things critical to your life. After you’ve determined what you want to save for, you can deposit your refund into said account to instantly boost your savings, which will likely only encourage you to build it more.
Invest in retirement accounts
If you’re going to save for retirement or other long-term expenses, compound interest is a necessity. Even in the past, when most savings accounts yielded stellar interest rates, they weren’t the only financial instrument people used to save. You may have heard of the word diversification, which is key to this behavior. Diversification simply means putting your money into different types of accounts with the hopes of yielding higher returns. Tax refunds are a great way to begin building other areas of your financial portfolio through things like IRAs, 401(k)s, ETFs or Mutual Funds, especially if your employer doesn’t provide you with any of these. Conversely, if you already have started investing, you can make a larger contribution the month you receive your refund. If you’re not completely comfortable with opening up a traditional retirement or investment account, opening a Certificate of Deposit may be a good place to start. Read our guide to Certificate of Deposits to learn more.
Finance your future
Spending the money isn’t always a bad thing, especially if it’s being put to good use. If you’ve ever wanted to start a business, make some improvements to your home, take classes or pay for a better insurance plan, you may want to consider using your tax refund to fund such an expense. While it may seem risky to use the refund all in one place, it may be one of the best ways to use the funds, as you’re essentially investing in yourself or your family, which could have some long-term benefits.
Get ahead on loan payments
For many, refunds are a means of debt relief, as they’re used to pay off credit card debt or a car loan. It’s true that if you’re struggling with debt, refunds can be a boon, but even if you’re not, they can still be of help. For example, you can use your tax refund to pay a principal payment on your mortgage or a student loan, which will help you pay off your debt faster. Similarly, your refund can help you with a down payment in the instance you want to apply for a loan to fund a large purchase, such as a car or home, or if you want to refinance any of your existing ones.
You don’t have to feel guilty for spending your refund on something personal; after all, your happiness and peace of mind are in some ways investments too. Just make sure to not go overboard — a refund is no excuse to plan the vacation to end all vacations. Also, realize that the choice between saving and spending isn’t all or nothing, as you can easily treat yourself with an allocated percentage of your refund and save the rest.
Should You Even Be Getting a Tax Refund?
While most taxpayers expecting a refund look forward to this annual windfall, most tax and finance professionals speak at length about the missed opportunity many Americans willingly forgo every year. They’re referring to the fact that refunds are essentially an “interest free” loan to the government — you’re simply receiving excess money you paid earlier in the year. Had you put the money in any type of savings or financial account, it would have compounded interest. As such, if your refund is really big, you might want to look into adjusting your W-4. Check your pay stubs or speak with your employer to see what the withholding from your paycheck is — if you can increase your withholding, you can decrease your refund size and keep more of your paycheck every month. That said, there are reasons to keep your withholding as it is, especially if your refund isn’t that big. In some cases, it can be somewhat difficult to gauge how to adjust your W-4, and any error in judgement could lead to you owing the IRS money come next tax season.