Assuming you’re like most taxpayers, you’ll be getting a refund in the neighborhood of $2,000 soon. And tempting as it may be to spend it all at once, you’ll be better off taking time to think about where you want your money to go. Spending your tax refund wisely can set you up for a brighter financial future. Here are some smart ways to put the money to good use.
Create a rainy-day fund
Life may look good now, but there’s always the chance that something can go south and you’ll need to be prepared. Experts recommend having three to six months of expenses in a rainy-day fund. This can prevent you from going into debt during a financial emergency. Use a portion of your refund to get started and make paycheck contributions throughout the year to reach your goal.
Pay off credit card debt
The average American has about 4 credit cards and doesn’t always use them responsibly. If this sounds anything like you, it’s easy to accumulate too much debt. If you only make a minimum payment, have at least one card that’s near the limit, and make late payments or don’t know your total debt; then chances are you’re in over your head. Stop swiping your card and spend your tax refund on your debt. One way to repay your debt is to use the snowball method. Start by creating a list of your debts from the smallest to largest balances (the interest rate doesn’t matter). Next, make the minimum payments on all your debts except the smallest one. Put all you can towards the smallest bill until it’s paid off. Repeat the process until all your debt has been eliminated.
Invest in an IRA
Are you on track to retire comfortably? Rule of thumb is that by your 30s you should have at least your annual salary saved, 3 times your salary by your 40s and 6 times your salary by your 50s. If you’re behind, use your tax refund to catch up by putting it in a traditional or Roth IRA. For 2023, the IRA contribution limit is $6,500 ($7,500 if you’re age 50 or older). The sooner you start saving for retirement, the more time your money has to grow.
Donate to your favorite charity
Anytime you do an act of kindness, your body releases endorphins, which makes you feel good. So a great way to spend your tax refund is to donate a portion to your favorite charity and help others in need. You can give money or property to your local church, nonprofit schools and hospitals, War veterans groups or other well-known charities. If you itemize, you can deduct your charitable contributions on your tax return the following year.
Buy life insurance
If there are people in your life who rely on you financially or you think your family would have a hard time covering your funeral expenses, you need to get life insurance. According to a 2021 report from the National Funeral Directors Association, the average cost of a funeral with viewing and burial costs $7,848. A funeral with cremation is $6,971. Most people don’t have that kind of money lying around. So, get coverage and give your family peace of mind.
You can either purchase a term or whole life policy depending on your budget and needs. Term policies are the more affordable option but it’s only good for a limited time, usually 10 to 30 years. Whole life policies cover you for life as long as you pay your premiums and some build cash value which you can borrow against. Most advisors suggest getting a policy that’s worth 10 to 15 times your annual income.
Save it for an upcoming expense
Instead of spending your tax refund now, save it for an upcoming expense. If you’re a working parent, you already know you’re going to need someone to watch your kids during the summer break. According to the American Camp Association, the average cost of day camp in the U.S. is $178 per day and $449 per day for sleep away camp. Although your refund may not cover the entire expense, it can help minimize the cost when summer rolls around. It’s also worth noting that sending your kid to day camp can help you qualify for the Child and Dependent Care Credit when you file in 2024.
Improve your home
There are several cheap home improvement projects that can add value to your home. For under $1,000 you can update your lighting, replace the kitchen countertops, hire professional cleaners, enhance your curb appeal or paint your walls. According to Zillow, painting your bathroom light blue can increase your home’s selling price by $5,000. So, grab a paint brush and get to work.
