Here Are 6 Smart Ways to Use Your Tax Refund This Year

Taxes were due last month and if you filed at the last minute, you might be expecting your refund any day now. 

The average refund is clocking in at $3,012, per the latest IRS filing data. With inflation costing US households nearly $300 more per month on average, your refund could help stretch your budget a bit further. 

But, if you don't need this money for rent, bills or everyday essentials, there are smart ways to put your cash to work for you.

Whether you're still waiting for your money or have it sitting in your bank account, here are six ways to use your tax refund to improve your financial health.

Whether it's credit cards, student loans, buy-now-pay-later services or medical bills, living with debt can be all-consuming. 

While your tax refund may not be large enough to wipe these balances clean, you can use it to make a dent in your debt -- specifically high-interest compounding debt

Credit cards tend to be the debt with the highest interest rates -- though this isn't always the case. Paying down the debt with the highest interest rate first (aka the avalanche method) can help you save money down the road in interest charges. 

Plus, with the Fed expected to raise rates as early as March, credit card interest rates are also expected to rise.

If you have multiple credit cards with similar APRs carrying debt, you could also opt to pay down the smallest balances first (the snowball method) so you have fewer remaining credit cards to worry about paying off.

"Tackling the card with the lowest balance first can be a quick win and give us the mental strength to pay down the remaining balances. It's an initial confidence booster that can go a long way towards becoming debt free," said Farnoosh Torabi, CNET Money Editor at Large.

An emergency fund is an important financial tool that can help you in the event of a job loss, salary decrease or unexpected financial emergency (like a hefty medical bill).

Your emergency fund should contain between three to six months' worth of expenses, which is the amount you spend on things like rent, utilities, groceries, gas and other essentials.

Your tax refund can help you get started on building an emergency fund. A high-yield savings account that earns slightly higher interest rates that you can access quickly is a great place to store this money. Many online banks like Capital One, Ally and Marcus offer high-yield savings options. 

And, if you have debt you'd like to pay down and no emergency savings to speak of, you might be unsure of how to best put your money to work. 

"Shore up some emergency savings first - even just a few hundred dollars - can be extremely helpful before embarking on your debt payoff strategy. 

It provides a buffer for unexpected expenses that won't cause you to sink further into debt. As soon as you have about a month's worth of essential expenses set aside, get more aggressive with your debt payoff plan," said Torabi.

While it may not be the most glamorous way to enjoy your money now, investing in your future is important at any stage of your career. 

You can use your tax refund to contribute to any retirement plans you have, 401(k)s or IRAs. In 2022, you can contribute up to $20,500 to a 401(k) and $6,000 for traditional and Roth IRAs. (If you're over 50, you can contribute an extra $6,500 to your 401(k) and $1,000 to an IRA.) 

"If maxing out your workplace retirement plan isn't feasible, consider investing enough to earn your employer's full match or contributing at least one to two percent more than last year," said Torabi. 

And, if you're already on track to meet your retirement goals, you could use your money to purchase an I bond, which could help grow your money by offering a higher savings rate than the rate of inflation.

Lastly, you could consider investing your refund. There's no one way to begin investing; it will look different for everyone. 

If you'd like to invest with minimal risk, purchasing an ETF, or exchange-traded fund, or index fund might make sense. 

Both options spread out your risk across different stocks and bonds that track a particular index, like the S&P 500. You won't get rich overnight with index funds or ETFs. They're more of a long-term play. 

If you want to take a more active role in investing and don't mind taking on higher risk, you could invest directly into the stock market through a brokerage. 

A few online options for investing in ETFs, index funds and stocks include TD Ameritrade, ETRADE and Fidelity Investments.

























Post a Comment

Previous Post Next Post