6 smart ways to use your tax refund
Your tax refund is an opportunity. For what? That part’s up to you.
When that big deposit hits your checking account, be ready for it. You can make a plan now to put that money to work on what’s most important to you right now. Check out these ideas.
1. Pay down your debt
One of the best gifts you can give yourself is to get rid of high-interest debt. If you have debts that charge interest, you’re paying money every month for owing that money. Wouldn’t you rather keep more money in your own pocket? That’s what’ll happen once you knock down your balances. Especially credit cards, which are so costly. Plus, bringing your balances down could make your credit score go up. Win-win!
2. Build up your emergency fund
One of the fastest ways to fall into debt is to be unprepared for the unexpected. Unexpected expenses aren’t an “if,” they’re a “when.” Everyone has them. Be ready for yours, so an unexpected expense doesn’t turn into a financial emergency. Stash some money in the bank so that the next time your tire blows or your roof leaks, you can pay for it without having to borrow.
Pro tip: Open an online high-interest savings account to earn interest on your money. If you save $2,000 in an account that earns 4% interest, you’ll earn more than $81 by the end of the first year. In contrast, you’ll only earn $2 if you leave your money in an old-school bank that pays 0.25%.
3. Invest in your now
Sometimes you need money to do what it takes to reach the next level. Maybe it’s time to take a class or get a certification so that you can earn more at work. Or it might be time to replace your computer so you can keep up with the increasing demands of remote work. What will help you level up?
4. Invest in your tomorrow
Let’s talk some more about earning money on your money (it’s what keeps rich people rich). A tax refund is a great way to boost your retirement savings.
If you have a 401(k) account, you can contribute as much as $22,500 in 2023. If you have an IRA and you’ll earn less than $151,500 in 2023, you can contribute up to $6,500. For people over 55, the limits are even higher.
The most valuable part of retirement savings is time, so you’ll get more bang for your buck if you’re younger. Let’s say you save $2,000 in a retirement account and average a 7% rate of return (normal for long-term investing). Your money will grow to more than $16,000 over the next 30 years, even if you don’t add any more to it. But hey—what if you did add to it every year? You get the idea.
5. Fix up your home
Home maintenance is more than changing a light bulb. It could be roof repairs after this past year’s crazy rainy season. It could be a smart thermostat that optimizes your heating and air conditioning efficiency. It could be a really nice mailbox that you’ve had your eye on (mailboxes are expensive!). Use your tax refund to treat yourself to something that'll improve your quality of life all year round.
6. Help others
Helping others is like making an investment in your inner light. There’s always someone worse off than you, and there’s no amount that’s too small to give. If you’re passionate about a cause, a tax refund is a great opportunity to gift the windfall to an organization that really needs it. The benefit you get is a good feeling that doesn’t come any other way.
With so many great options, it might be hard to decide how to use your tax refund. Go with the one that brings you the greatest satisfaction.
