5 Smart Ways to Use Your Tax Refund
If you’re expecting a tax refund this year, you might be wondering what money moves can help you make the most of it. Should you save it? Invest it? Or spend it? Here are five of our favorite strategies for how to use your tax refund.
1. Supersize your emergency fund
You know how important it is to have a well-stocked emergency fund. When life unexpectedly sets you back financially—a blown water heater, a major medical bill, or a pink slip—your emergency cash reserve can help keep you afloat and out of unnecessary debt.
One of the tried and true ways to build your emergency savings is to slowly fund it bit by bit with automatic contributions from every paycheck. But by making a lump sum deposit using your tax refund, you’ll reach your goal much faster.
How to save it: Assuming you regularly contribute $100 a month and your target balance is $5,000, it will take you four years to get there. Next, let’s assume you receive last year’s average federal tax refund of $3,000. If you drop that amount directly into your emergency savings fund account, you’d reach your target savings goal in only 1 year, 8 months.
> Tip: How big should your emergency fund be? Figure it out with this easy calculator from Money Under 30.
2. Decimate debt
How amazing would it feel if you could knock out a debt that’s been hanging over your head for far too long? Or how would it feel to take a massive bite out of an overwhelming credit card balance? When you use your tax return to pay off debt faster, you can save yourself years of worry and likely thousands of dollars in accumulated interest.
How to spend it: Suppose you typically pay the minimum owed ($200 for example) toward an outstanding $5,000 credit card balance. Assuming a 15% interest rate on that card, and that you don’t add any more to it, you’ll be paying off that card for a whopping 79 months (six and a half years!) and shelling out $2,900 in interest before you’re done.
But what if you applied your $3,000 tax refund to that debt while continuing to pay the monthly minimums? You could be debt-free in only 23 months and save yourself more than $2,500 in interest payments. Now that’s progress.
> Tip: If you want to see how much time and money you can save by making a lump-sum payment toward your debt, punch your numbers into Student Loan Hero’s Extra Payment Calculator.
> Tip: Need to tackle even more of your debt than your tax refund can handle? Try bridging the gap with a personal loan that can transfer balances for you.
3. Upskill your income
In today’s job market, fine-tuning your skills can mean more money in your pocket. The rewards of being more effective in your current line of work, more confident when you ask for that raise, or positioning yourself for a better, higher-paying job, is an investment that can pay you back many times over.
How to spend it: Whether you clean homes, field customer service calls, or write code for a living, consider spending part of your tax refund improving your communication skills or core job skills, or learning something new altogether. This could mean paying someone to rewrite your resume, going back to school to obtain a special certification, or buying the tools you need to improve your work productivity. No matter what, investing in your skills can ultimately lead to an increase in your future earning potential.
> Tip: Read more about the skills most worth learning in 2019.
4. Reach a big goal faster
You probably have several medium-to-long-term goals for your cash, such as:
- Covering the cost of your kids’ continuing education
- Paying up front for the wedding or car of your dreams
- Putting a down payment on a home
- Launching that small business you’ve been dreaming about
- Retiring by the time you’re 70
If you’ve prioritized building a strong financial foundation, you’ve already put a plan in motion to reach those dreams. And if you pour that tax refund directly into your savings goal, you’ll get there much faster.
How to make it happen: If your goal is savings, opening a dedicated, high-interest savings account is a good way to watch your money grow and easily accessible. If your goals include planning for retirement or putting money away for future use, look into specialized accounts that offer tax benefits such as opening an IRA or a custodial account to grow your cash for your children’s future expenditures once they come of age.
5. Invest to grow your money for your future
If you’ve got a good handle on your emergency savings, credit situation, and other near-term financial needs, maximizing the impact of your tax refund over the long haul by investing it may be of interest. If you invest in something like LendingClub Notes, a fixed income alternative, you have the option to not only invest your initial tax refund dollars (your principal investment), but to reinvest your principal and interest as you get monthly payments, which may help your investments grow more quickly.
How to invest it: Here’s an investment scenario to consider. By investing the average 2018 Federal tax refund amount of $3,000 and any dividends, and assuming an annual return of 7%, after 10 years you’d nearly double your money. The longer your time horizon, the more you could see your money grow.
Of course, investing comes with a measure of risk. The market is constantly moving so it’s important you research the track record of the securities or other investment instruments you put your money into. LendingClub investors have historically seen returns of 3% to 8%, so you may consider putting your tax refund into a taxable, retirement, or custodial LendingClub investment account.
So how will you save, invest or spend your tax refund this year? Choose one of these smart money moves to quickly make a powerful impact on your financial future.