Phew. With tax filing nearly behind us, now comes the fun part. Refund! Most people are likely to get one — in 2017, the IRS sent out nearly 112 million tax refunds, averaging $2,895 each. First things first: If you’re getting a big refund, you might want to consider adjusting your withholdings so you’re not sending the government too much money.
But if you do get one, what will you spend it on? In prior years, most people who have gotten a refund have used it for paying off debt or saving for the future. That’s good news, because using a windfall on either of those things is a smart move. Here’s why:
IF YOU PAY OFF DEBT
If you have credit card or other high-interest debt, using your tax refund to pay it off will save you big in the long run.
For example, let's say you have $2,895 in credit card debt with a 19.9 percent annual percentage rate. You're making monthly payments of $100. At that rate, it would take you 40 months or more than three years to pay off your balance. By using your tax refund to pay off your debt now, you will save $1,082 in interest payments and you won't have the worry about that debt hanging over you for the next three years.
IF YOU PUT IT TO WORK
If you’re in good financial standing and don’t have any debt other than a mortgage and student loans, both of which have low interest rates, you might want to invest in your future.
If you take that $2,895 and put it in a mutual fund, stock, or other investment and you’re able to get a return of 6 percent per year, in 10 years that investment will have grown to $5,267.15 through the power of compound interest.
If you’re able to get 6 percent growth each year for 20 years, it would grow to $9,583.04. That’s a significant increase on your original amount.
That could help you reach your savings goals more quickly. That might mean you could retire early or pay more to help your kids come out of college with less debt. These types of small choices could add up — and change your life.
Of course, just because your tax refund can be used to make a huge impact on your future finances doesn’t mean that you can’t use it to splurge a little now. Some people set aside a percentage of windfalls they get and then decide to use the rest for something they will enjoy immediately. That way you can have fun and enjoy your money while also making an impact on your financial future.