The average refund for federal tax returns is nearly $3,000. And I know plenty of you also end up getting some money back when you file your state tax as well.
Don’t blow it! Look, I know how easy it is to see your refund as a windfall. And that triggers thoughts of vacations, new wardrobes, or a new gadget or two.
But a tax refund you spend isn’t nearly as valuable as a tax refund you save.
Three of my favorite ways to use a tax refund to build financial security.
Pay Down Your Credit Card Debt. This year paying off credit card debt is more important than ever. Now that interest rates are beginning to rise, credit card companies are boosting what they charge in interest for unpaid balances. The average is around 15%. There is no better investment than to use a tax refund to pay down your credit card balance. That’s like earning a 15% return on your money!
Boost Your Retirement Savings. Let’s say you are getting a $3,500 refund this year. Invest that in a Roth IRA that earns an annualized 6% over the next 20 years and your tax refund this year will eventually be worth more than $11,000. You can’t tell me tripling the value of this year’s tax refund isn’t a great deal.
Be Ready for Emergencies. It is so upsetting for me to read the surveys that say a majority of Americans don’t have $1,000 or so set aside to deal with emergencies. This is your chance to start an emergency fund, or top off a savings fund that doesn’t yet equal eight months of your living expenses. Just think of the peace of mind that will come when you know you have more money set aside for dealing with life’s what-ifs.