Last year, the IRS reported that nearly 126 million refunds were issued, with an average refund of $2,549. That’s not pocket change, and for some, that’s bigger than a paycheck. So, what do you do with a tax refund? Do you spend it? That new TV or spontaneous vacation might be tempting, but there are more beneficial ways to spend your tax return that put you one step closer to financial security.
The best way to spend your tax refund is to use it wisely. No matter how you budget your tax refund, you should always put your financial goals at the forefront of your decision. Here, we offer seven financially savvy tax refund spending ideas.
How to Spend Your Tax Refund Wisely
1. Put a Dent in Your Debt
If you’re looking for ways to use your tax refund wisely, look no further than eliminating any high-interest credit card balance you may have. If you don’t have enough money to cover all your outstanding balances, start with the one that has the highest interest rate and move down the rate ladder. By “snowballing” your balances, you’re reducing the amount you have to pay in interest, which can add up to hefty savings. Taking steps to eliminate credit card debt is worth more than a one-time purchase.
2. Pay Down Your Mortgage
Use your tax refund money to make an extra principal payment on your mortgage. Adding just one extra payment a year can knock years off of your payment plan. Want to see how? Online calculators (such as this one) can help you calculate how many months or years you could shave off of your mortgage. Seeing just how much you could save can really help put a windfall like your tax refund check into perspective.
3. Fund Your Child’s Education
Another smart way to spend your tax refund is to start or increase your child’s college savings fund. It may not seem like much now, but after a few years, you could have a hefty balance to help with the ever-rising costs of higher education. A Farm Bureau advisor can help you identify college funding options that can help you maximize your college savings and help your child avoid costly student loans.
4. Donate to Your Favorite Charity
Pay it forward by donating your tax refund to your favorite charity. Not only are you able to support a cause you believe in, but you could also qualify for an extra income tax deduction for the following year.
5. Invest in Your Retirement
While saving extra money that comes your way is smart, sticking it in an envelope inside your sock drawer isn’t the best way to do it. While you have the money in a (relatively) safe place, it isn’t doing anything else for you — like compounding interest and making you more money.
One of the best ways to spend your tax refund is by investing it in your retirement account. Talk with a financial advisor to find out what options you have for saving your money in a fund or account that will accrue interest. Many retirement savings fund options exist, including 401(k) funds, IRAs, mutual funds, annuities and more.
6. Treat Yourself
It’s okay to indulge by spending a little extra every now and then, but don’t spend your tax refund on impulse buys. A good way to figure out how to spend your tax refund intelligently is to write down all the things you want to save for and prioritize them by importance. This can range from short-term (like a new computer) to long-term (like a dream vacation). Then, use your tax refund to budget for those purchases.
7. Diversify Your Tax Refund
Still not sure how to spend your tax refund? Use your refund to work on several financial goals. By looking at the big picture and greater good of your financial future, you may uncover options for stretching those extra dollars. Consider splitting your tax refund between some of the following:
- A large purchase or upcoming expense, like an appliance or a wedding.
- Home renovations, which could improve the value of your home.
- A life insurance policy to help give you and your family peace of mind.
- Your emergency fund.
Need Help Creating a Plan?
If you would like some ideas on how to create a plan to help you meet your financial goals, contact your Farm Bureau agent or advisor today for more information.