10 Ways to Get the Most Out of your Income Tax Refund
1. Pay down high interest loans and lines of credit. With average annual interest rates for credit cards and personal loans hovering around 15%, paying off that credit card before making other investment decisions makes good sense.
2. Open an emergency account. Most Americans don’t have a savings account with money set aside for financial emergencies. A large tax refund is a great start for an emergency savings account. Experts recommend that it should eventually total between three to six months’ worth of essential living expenses.
3. Fund Your Retirement Account. If you haven’t invested in a retirement account, seriously consider contributing to it right away.
4. Invest it. Instead of working for your money, let it work for you. If you invested one lump sum of $1,500 in the stock market, over 30 years, assuming a 12% return, you’d have $53,924! (Of course, do your research first before making any investment decisions and talk to licensed investment professionals.)
5. Pay for repairs. Maintaining expensive possessions now will result in dollars saved tomorrow. Use the money to replace those dangerous bald tires with new, safe ones; repair that leaky roof before it develops into a bigger problem.
6. Start a personal endowment. Investing in your emotional, physical, intellectual, and career growth is a wise use of money. Whether it’s taking a class to further your career, paying for a gym membership or a cooking class, you’ll feel effects of this type of investment fast.
7. Make an extra home mortgage payment (or two). Though you won’t feel the benefit immediately, doubling up on a mortgage payment now can save you months of mortgage payments later.
8. Donate to a charity. Giving back to the community is a wonderful way of supporting a cause that you are passionate about. Even better – in many cases at least a portion of your donation is tax-deductible too.
9. Open a College Savings Plan for your child or future child. A four-year, out-of-state college education can cost over $100,000. Save for your child’s college education with a college saving plan. For the most part, withdrawals are completely tax-free when used for higher education purposes. Talk to a licensed investment professional about your different options.
10. Plan a vacation. If you are in a fluid financial position, and can truly afford a bit of luxury, do something you’ve been dreaming of. Money is to be enjoyed as well as earned, saved, and invested. Go ahead. Book that cruise!
Although all the preceding ideas are excellent uses for a lump-sum amount of cash, remember that instead of planning for a refund, it could be more beneficial to come out even. A tax refund is an interest-free loan to the government, and money that is not in your pocket every month. If you have been getting a refund back each year, consider changing your withholding exemptions so less tax is withheld from each paycheck. While a tax refund may feel like a gift from Uncle Sam, it’s not—it’s money that you have overpaid on your income taxes. That said, some people use this as a form of saving.
*This publication is only intended to be used for general informational purposes. Consult a tax professional for the most current data and/or personal advice.