From splurging on a vacation to paying off debts, there are plenty of different ways that Americans spend their tax refunds. While some think of tax refunds like winning the lottery, others tend to err on the side of caution with how they spend their refunds. If you’re on the receiving end of a check from Uncle Sam, there are several options to responsibly utilize your extra money. No matter how large or small the sum, here are the best ways to make the most out of your refund.
Pay Bills or Debts
If you have upcoming bills that you’re struggling to pay, your money should go there first and foremost. Whether it’s car, mortgage or rent payments, the last thing you’ll want to do is fall behind. Ideally, you should choose direct deposit as your return method and e-file, as this is the quickest way to process your return. If you’re really in a jam, you may even get your refund earlier by choosing a checking account that allows you to receive your direct deposit in advance.
On the other hand, if you’re paying off long-standing debts, it’s still important to make strides with those payments rather than putting them off. The more you can pay off at any given time, the less your interest will compound and save you money in the long haul. One strategy to consider is the debt snowball method by Dave Ramsey. He states that you should make all minimum payments on your debts, and then use any extra money to focus on paying off your smallest debt. Once you have paid that one off completely, move onto the next biggest debt. This is the best way to knock debts off your list as quickly as possible.
Invest for Retirement
A report by the Federal Reserve discovered that a staggering 25% of Americans have no retirement savings. Luckily, that number drops for every subsequent age group starting from 18-29 to 60-plus. Still, the average life expectancy is more than 10 years beyond the retirement age of 65, which means that people need considerable savings to retire on time and live comfortably. With 42% of Americans aged 18-29 having no savings for retirement at all, there’s never a bad time to start.
Rather than treating yourself to a vacation or buying goods you don’t need, consider a portfolio of long-term investments for retirement. A great option is a 401k, especially if your employer offers some kind of match. A good rule of thumb is to contribute the percentage that your employer will match, at the very least—it’s like getting free money. Another good option is an IRA or Roth IRA; with either option, you won’t withdraw your cash until you’re 59 ½ years old. With an IRA, you don’t pay taxes up front—you only pay when you withdraw. A Roth IRA is the exact opposite, you’ll pay the taxes now and won’t have to in the future. One or all of these options will better prepare you for the future.
Make a Big Purchase
Making a big purchase doesn’t mean spending your refund on something you don’t need. Rather, maybe there is an expensive purchase in your life that you know you need to make, but haven’t had the funds to do so. A tax refund is the perfect opportunity to finance one of these purchases.
Expensive, yet necessary, purchases such as a new roof, home renovation, or car repair are all worthy expenditures. Hopefully, you can avoid going into debt over these purchases with the help of your refund. Furthermore, when making these large purchases, you should also keep track of the financial records associated with them. You may be able to receive a larger refund next year by itemizing and writing off the sales tax.
A tax refund is like a bonus that makes tax season worth the stress and hard work in the end. However, just because it feels like a bonus doesn’t mean you should spend it like one. Making smart decisions with your tax refund will set you up for future financial success.