Last year, more than 125 million Americans got a tax refund — one of the few perks that comes with having to file your taxes. And with the average refund topping out at just over $2,500, there’s a chance you may have some cash sitting in your bank account.
Ultimately, what to do with your tax refund depends on your goals and priorities. Read on for some smart ideas for what do with your refund.
Treat yourself to a splurge
Yes, you read that right. Setting aside a portion of your refund for a splurge is not only well-deserved, it can also help you stay on track with your other goals. So whether that means a fancy dinner for your next date night or an outing with friends, your refund can be used for something fun without having to dip into your everyday budget. In fact, whenever you receive any sort of windfall, consider setting a percentage aside for discretionary spending so that you get to enjoy some of that money now, in addition to using it for other goals.
Save for a goal
A tax refund can be a great way to start saving for a bigger goal. For instance, maybe you've been itching to take a trip abroad, or have been thinking about upgrading from your starter home to your dream house. Or maybe you just need to boost your emergency fund so you’re prepared for any unexpected expenses.
Whatever the goal, the first step is to set aside some money for it. If it’s a short-term goal, meaning something you want to accomplish within a few months or years, consider putting your goal money into a high-yield savings account where it’ll be easier to access when you need it. (Consider making it separate from the bank where you hold your primary checking account, so you won’t be as tempted to transfer money from your savings to your checking.)
If you’re saving for a long-term goal, like a down payment on a bigger home that you may want to buy in the next 10 years, consider saving for it in an investment account, where your money can potentially grow faster with the help of the markets. A financial advisor can help you determine the best way to save and grow your money based on your goals and timeline.
Tackle any high-interest debt
You can make progress on your financial goals while also managing your debt, so consider using your refund to knock out some high-interest debt, like credit cards that charge you double-digit interest rates. By reducing or eliminating the amount you pay in interest each month, you’re freeing up future cash in your budget.
Let’s say you have a $2,900 balance on a credit card that charges a 20 percent annual percentage rate, and you’ve been putting $200 a month toward paying it down. If you decide to use your refund to pay off the balance all at once, you’ll be saving yourself 17 months of payments and $447 in total interest. Plus, you’ll have $200 each month to use for something else.
Even if you decide to put just $500 of your refund money toward that balance, you’ll be shaving off three months from your payoff timeline, and nearly $150 off your total interest paid. That’s money that can be freed up to put toward other, more fun goals.
Boost your retirement savings
Even if you’re already putting money away in a 401(k) or IRA, it never hurts to give your nest egg a little more padding. Because the earlier you start saving, the more time you have to take advantage of compound growth.
If you have $20,000 in an IRA that grows at a hypothetical 6 percent a year, in 20 years you’ll have more than $64,000 in that account, even if you never add to it again. But if you bump that amount up to $22,000, you’ll have more than $70,500 over that same time frame.
Of course, how you decide to use your refund really depends on your situation and what you’re trying to achieve. You might have one particular goal you’re focused on, and that may be where your refund goes. Or you might put the money toward several goals, allowing yourself to enjoy something right now and save for something you’ll enjoy in the future. An advisor can help you figure out how to balance all the priorities you have in your financial plan.
No investment strategy can guarantee a profit or protect against loss. All investments carry some level of risk including the potential loss of principal invested.