The US government sends out billions of dollars in tax refunds each year, and the average return this year is about $2,727. So if Uncle Sam hands you some cash back, what’s the best thing to do with it?
Tax refund move #1: Pay down that credit card debt.
We recommend paying off your high-interest (read: credit card) debt, if you have it, before you invest. That’s because high-interest credit card payments are likely to eat away at any investment returns (or cancel them out altogether). Your goal with any money move is to make progress, not tread water. So use those extra tax dollars to put an additional dent in that credit card debt first.
Here’s our best advice for creating your debt plan of attack.
Tax refund move #2: Get covered for emergencies.
As kids, we were all taught to call 911 when disaster strikes. But in the case of a financial emergency, your local switchboard operators probably can’t help you. That’s why having an emergency fund is a big step toward financial freedom.
A good guideline is to keep three to six months’ worth of take-home pay in its own easily accessible bank account. This is “life happens” money, and it needs to be on hand immediately if and when (hopefully if) you need it.? (Here’s some more advice about emergency funds, if you’re looking.)
So if you’re free of credit card debt but haven’t built up an emergency fund yet, stash some of that tax refund away in savings now.
Tax refund move #3: Put those tax dollars to work
If you’ve already worked hard to pay down your credit cards and build emergency savings, congrats! You’re on fire.
Now you have a choice: You could either let that refund sit in the bank and earn little to no interest, or you could put it to work for you and your most important goals — creating the retirement you’ve been daydreaming about, launching that genius business idea, getting to a down payment on the house with the pool/outdoor kitchen/majestic views/room for kids/all of the above. (Which choice do you think Future You will thank you for?)
We think one of the smartest money moves you can make is to invest regularly — a bit out of each paycheck — into a low-cost, well-diversified investment portfolio. If you’re just getting started, you can open your account, use your extra tax money to make a big-time contribution to your plan, and then set up smaller, automatic contributions going forward.
If you’re already an Ellevest client (meaning you’ve added money to one of your financial goals with Ellevest before), you can even have your tax refund deposited directly into your Ellevest account. Just give your account’s direct deposit information to the government when they ask you where they should send your money (just like you’d give that info to your payroll provider if you were setting up regular paycheck deposits).
So that’s our advice: Pay off credit card debt, build your emergency fund, and then invest in your goals. Hear that? It’s the sound of Future You asking for a high five.
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