Get the Most Out of Your Tax Refund: 6 Strategies
According to the IRS's most recent tax data, the average tax refund for the 2022 tax year — for which tax returns were due by April 18 — is $2,878 through April 7, a decline of 9.3% compared to the same period last year.
Now that tax season is over, it's time to turn your attention to smartly utilizing all that extra cash.
It's easy to be tempted by shiny new gadgets or discount vacations, but before you splurge on something that won't have long-term implications for your financial future, consider these six strategies for getting the most out of your tax refund. Whether you're looking to pay down debt, save money for a rainy day, or invest in yourself and your future, these strategies will help you maximize the value of your money—so you can get the most out of life. Let's get started!
1) Boost Your Emergency Fund
One of the smartest things you can do with your refund is to put it towards boosting your emergency fund. Your emergency fund is one of those things that you hope you never need—but when life throws an unexpected curveball you'll be glad you took the time, and money, to set one up. We typically recommend having enough saved in an emergency fund to cover 3-6 months of expenses, so if you are still building up yours, your tax refund could be enough to get it started. Investing in this type of “insurance” gives peace of mind knowing that you have a cushion when those surprise bills arrive.
2) Invest for the Future
Now that you're wise to the tax refund game, you can use your newfound money to do something even smarter—invest it. Investing is an important part of financial planning, and can help ensure your future security, whether that's for retirement or for a rainy day.
You have plenty of options when it comes to investing your refund. Here are a few:
Build an emergency fund:
An emergency fund is typically 3-6 months' worth of living expenses stashed away in case disaster strikes. It's designed to get you through difficult times without taking on debt or compromising your long-term life plans.
Invest in stocks or bonds:
Start a 529 plan for college expenses:
A 529 plan is an account specifically designed for educational expenses and can be opened by anyone with an SSN. Depending on where you open the plan, the funds may be subject to state taxes when withdrawn, so be sure to check before investing in one.
3) Make Necessary Home Repairs and Upgrades
The third way to put your tax refund to good use is to make necessary home repairs and upgrades. Investing in your home can be a great way to add value and make sure that it is functioning at its best.
Here are some ways you can use your tax refund to improve your home:
Add insulation or weatherproofing:
Keeping the temperature of your home regulated can help you save money on energy bills and increase the value of your property.
Repair plumbing and electrical systems:
These are two essential systems that need regular maintenance in order to prevent costly repairs down the line.
Upgrade windows and doors:
Replacing old windows, doors, or other fixtures can help reduce energy costs as well as improve the look and feel of your home.
Invest in new appliances:
Buying new appliances can save you energy costs in the long run, as well as give your kitchen a much needed update.
Refinishing hardwood floors or other types of flooring can give any room a fresh look and increase the value of your property over time.
A coat of paint (or two!) on the walls will breathe new life into any room, from living rooms to bedrooms to bathrooms.
4) Help Pay Off Student Loans or Credit Card Debt
You might not have thought of using your tax refund to pay off debt, but this can be a smart way to gain financial freedom. If you have student loans or credit cards, your tax refund could be the perfect opportunity to get rid of them and reduce the amount of interest you will be paying in the long run.
Student loans typically have higher interest rates than other forms of debt, so it could make sense to use your tax refund to tackle some of that debt first. By reducing or eliminating this type of high-interest debt, you can free up more money in your budget each month. Paying off your student loans or credit card debt can also help improve your credit score, which is an added bonus!
To decide how best to allocate your tax refund toward debt reduction, consider using a payoff calculator. These calculators show you how much money you need to pay each month in order to repay all of your debt within a certain number of years. This can help you prioritize given the amount of money you have available from your tax return.
At the end of the day, using some or all of your tax refund for debt repayment is a smart move that could save you a lot in interest over time and give you more breathing room in your budget.
Resident Student Loan Analyst
Related: 2023 Student Loan Expectations
5) Create a Vacation Fund
You've probably been dreaming of a getaway for a while now—and what better way to use your tax refund money than to create a vacation fund?
It's easy: set up an account with your bank, and automatically transfer some of your refund into that account. That way, you won't be tempted to use it for other spending, and you'll be able to watch it grow until it's just the right amount for whatever vacation you have in mind.
Decide Your Destination
When you are planning your vacation, decide what type of vacation do you want—the beach or mountains? A road trip or exotic overseas getaway? Then start researching flights, hotels and excursions so that you can budget accordingly.
Set Up Reminders
Set up reminders on your calendar when payments are due so that you don't miss anything. That way, you can make sure everything is paid off before your trip arrives.
Invest in Insurance
If something unexpected happens before or during your trip — like catching the flu or having something stolen from hotel room — make sure you have travel insurance. It could save you money (and peace of mind) in the long run if something were to go wrong.
The best part about creating a vacation fund is that once the money is saved up, it can be used for anything related to the trip! Whether it's paying for airfare, sightseeing excursions or souvenirs for friends back home—it'll all be taken care of before the vacation even starts!
6) Invest in Yourself and Your Business
The last thing you can do with your tax refund is invest in yourself and your business. It’s important to remember that the most successful people in business are constantly investing in themselves and their businesses.
By investing in yourself, you can acquire new skills and knowledge that will help you reach new levels of success. This could include attending educational seminars, pursuing certifications, or hiring a consultant to provide specialized expertise.
If you own a business, think bigger-picture investments such as upgrading your computers or purchasing marketing materials that will take your business to the next level. Another great way to invest in your business is to use your refund for advertising costs, or for research and development on a new product or service line. You can even use it to develop an employee training program or hire more employees.
No matter which route you choose, putting your tax refund towards expanding your knowledge and capability pays dividends far into the future. Take the time to really assess what opportunities lie ahead of you and make an investment – be it education, tools, staff, or something else – that will pay off for years down the line.
Your tax refund is a great opportunity to face some of your financial challenges head-on. Whether you choose to use it as a down payment for a home, start an emergency fund or pay off debt, it's important to make the most of this financial windfall.
Remember, a tax refund should serve to further your financial goals and put your financial life in order. To make sure you're making the most of your tax refund, assess your current financial standing and map out your short-term and long-term financial goals before deciding the best way to spend it. When it comes to your tax refund, don't just settle. Make sure you're getting the most out of that money, and use it to give you the financial freedom you deserve.
I hope this information was helpful! If you have any questions, feel free to reach out to me here. I’d be happy to chat with you.
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About the Author
As Managing Partner of Vincere Wealth, Josh assists clients in navigating financial challenges and making sound financial decisions. Having someone guide you in making sensible financial decisions today can have a substantial impact on your future financial wellbeing. Josh takes great pride in guiding customers through the complexities of taxes, real estate, businesses, employer stock and international financial planning.
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This post is just for informational purposes and is not meant to be financial, legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own financial advisor, attorney, business advisor, or tax advisor. Vincere Wealth Management accepts no responsibility for actions taken in reliance on the information contained in this article.