During tax season, you’ll generally find two groups of people: those who are bummed because they owe the government money and those who are thrilled because Uncle Sam is about to send them a refund check.
In fact, last year over 111 million people received an average tax refund of $2,869.
That’s a whole lot of extra cash to boost your savings.
The key here is to use your tax refund wisely rather than frivolously spend it all. If you find yourself with a windfall this tax season, here are 10 smart ideas for how to use it.
1. Create or boost an emergency fund
Saving for a rainy day is important. An emergency fund is a savings account that you can turn to when something unexpected happens, like your car breaks down or you need to make home repairs. With an emergency fund, you’re less likely to reach for a credit card or take a loan when you’re short on cash.
2. Pay off high-interest debt
High-interest debt can weigh down your financial future. Rather than putting money into savings, you’re spending your money each month paying interest on previous purchases. With the average interest rate on credit cards over 17%, those interest payments add up.
Consider using your tax refund to pay down your high-interest debt. Not only will you stop paying interest every month, but you may even boost your credit score.
3. Invest in your education
Are you looking to make a career change or do you need some additional education to advance in your career? You might consider using this tax refund to invest in you.
Maybe you want to make the jump to a technical career and attend a programming bootcamp. Or, perhaps you just need a few more solid skills to help you nab that next promotion.
If you put that money into continuing your education, you may also qualify for the Lifetime Learning Tax Credit on next year’s return.
4. Contribute to your retirement
Most American’s don’t have enough saved for retirement. If that’s you, one of the smartest things you can do for your future is to contribute to your retirement today.
Use your tax refund to open or contribute to an existing individual retirement account (IRA). So, let’s say you take your $2,869 tax refund and put it into a retirement account every year for the next 30 years. If you earn an average interest rate of 6%, that money will be worth $256,905 when you reach retirement. Not a bad nest egg!
5. Win more money
Ok, so I’m not talking about gambling away your tax refund. The SaveYourRefund program from Commonwealth and AARP Foundation offers more than $30,000 in prizes for people who save at least $50 of their tax refund. To enter, use form 8888 to send a part of your tax refund directly to savings and enter the giveaway on the SaveYourRefund site.
6. Start your business
If you’ve wanted to start a business, but you’ve just needed a little extra cash to help with the initial cost, think of your tax refund as the seed money to help you get started. Use it to buy materials for your Etsy store or set up a website and open the doors to your new business venture.
7. Save for an exciting goal
Maybe you’ve been meaning to start saving for a down payment on a home, a new car, or some home improvements. Take this tax refund as an opportunity to jumpstart that savings. If you don’t have a specific goal in mind, earmark your refund to your savings account anyway. You’ll think of the goal soon and you’ll be glad that you didn’t let that money slip away with regrettable impulse buys.
8. Contribute to your child’s education fund
If you have kids, you may have started to think about the fact that the cost of college is rising at a rapid pace. Many graduates are left with tens of thousands of dollars in debt as they start careers.
If you want to help your child pay for college, look into stashing your refund money away in a 529 plan (if available in your state). That money will be set aside for their education and you may even get a state tax deduction for next year, making it a win-win.
9. Make an extra mortgage payment
Making an extra mortgage payment may not feel like you’re doing much, but it’s a smart move. An extra payment will reduce your principal balance.
With so much of your mortgage payment going to interest, reducing the principal amount will lower the amount you pay in interest. Over the years (or decades) that extra payment can save you thousands of dollars.
10. Donate to a favorite charity
If there’s a charity that’s close to your heart, consider spending some of your tax refund to make a donation. Not only will you feel good about this, but you may be able to deduct that donation off your next tax return if you itemize your deductions.
Keep More of Your Money
While getting a tax refund is a fun windfall at the end of the year, it’s good to remember that overpaying in taxes is akin to giving the government an interest-free loan.
If you want to avoid doing that next year, use the Paycheck Checkup tool on the IRS website to make sure the correct amount is withheld from your paycheck.
And remember this: If you get a refund, spend it wisely.