The U.S. government sends out billions of dollars in tax refunds each year, and the average return this year is about $2,895. So it makes sense that most Americans expect to get a refund this year (or they filed and got it already … not every single one of us waits until Tax Day … just most of us). So, if Uncle Sam hands you some cash back, what’s the best thing to do with it?
Personally, I’ve been eagerly awaiting my tax refund (anyone else obsessed with the “Where’s My Refund?” tracker?), because I'm hoping to do more investing this year. But you’re going to want to cover all the bases before you decide on the right money move for your own refund.
Tax refund move #1: Pay down that credit card debt.
Pay off your high-interest (read: credit card) debt, if you have it, before you invest. That’s because high-interest credit card payments will likely end up eating away at any investment returns, or canceling 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.
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 in cash is always important.
A good rule of thumb is to keep three months’ worth of take-home pay in an easily accessible, risk-free savings account. This is “life happens” money, and it needs to be on hand immediately if and when (hopefully if) you need it.
Bottom line: If you don’t have credit card debt, stash some of that tax refund away in savings now if you haven’t already built up an emergency fund.
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, it’s time to invest in yourself. Tax refunds aren’t free money. You worked hard for that money, actually — so help it work for you through investing.
You could either let it sit in the bank and earn less than 1% 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 plan 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. So get an investment plan, girl! You can use your extra tax money to make a big-time contribution to your plan. Then, you can set up smaller, automatic contributions for subsequent months.
We hope you do, and we hope you use the tax money you get back to invest in your future.
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