If you want to maximize your tax refund, these genius tips will put your cash to work so you’re one step closer to living the good life.[Put your tax refund to work]
Don’t know what to do with your tax refund?
Are you torn between splurging on a much-needed vacation and paying off your student loans?
The IRS says the average taxpayer received a refund of $2,729 in 2019[*].
If you follow the “found money” mantra and spend your tax refund on a shopping spree, cruise, or one-time extravagance, that’s cool.
But using it to fund a goal that leads to greater financial freedom is even better.
10 Ways To Get The Most Out Of Your Tax Refund
Try one of these tips to maximize your tax refund and you’ll feel like the smart, accomplished adult you were always meant to be:
#1. Pay Off Your High-Interest Credit Card Debt[And boost your credit score]
A $5,000 balance on a credit card with a 15% interest rate will accrue $400 in interest in one year. That same balance on a card with a 25% interest rate will rack up $700 in interest.
Paying off a high-interest credit card with your tax refund not only lowers your credit card debt but also saves you money on interest fees.
It even boosts your credit score, which makes you more attractive to personal loan lenders.
If your tax refund is just a drop in the bucket, a personal loan can help you pay off your credit card debt completely.
And since interest rates for personal loans are typically lower than those for credit cards, you may actually save money in the long-run.
#2. Start an Emergency Fund[Always be prepared]
Are you part of the 41% of Americans who would struggle to pay for a $400 emergency[*]?
You’re just one car breakdown, unexpected medical bill, unanticipated pet emergency, or cut in work hours away from financial chaos.
While you can’t prevent these nightmares, you can use this year’s tax refund to finally set up an emergency fund to handle them.
Experts recommend saving between three and eight months worth of rent and living expenses in an interest-bearing online savings account or money market account.
This will surely take more than one tax refund but it’s a great foundation to build on.
Most importantly, do not touch your stash unless it’s an actual emergency (seriously!).
#3. Retirement Savings: Just Do It.[Retire your way]
Over 40% of working people don’t have anything saved for retirement[*].
Since time is on your side when you’re young, you can save for retirement without touching your livable income by simply starting with your tax refund. You’ll have decades to grow that initial seed into a strong money tree.
At a 10% return rate, an annual $3,000 contribution (i.e., your tax refund) made over the next 40 years could grow to $1.5 million.
#4. Buy Life Insurance[Protect the ones you love]
Still waiting to set up a term or whole life insurance policy?
Use your tax refund to give yourself and your loved ones peace of mind should you leave this world suddenly.
Life insurance rates are cheaper when you’re young and healthy and skyrocket as you get older. A typical tax refund will be more than enough to cover a $1 million term life policy for those under 60-years old.
#5. Save for a Down Payment[Buy a home]
Your tax refund may be the perfect place to begin your journey towards homeownership.
In 2019, the median home price in the US dropped to $227,000[*].
If you’re preparing to buy your first home, you’ll want to save between 3% and 20% of your budget as a down payment.
The more you have saved, the less you have to borrow and mortgage. This will also make it easier to get approval for a home loan.
Invest your tax refunds for a few years and you’ll bank enough to snag the home of your dreams.
#6. Add Value To Your Home[DIY smartly]
Want to sell or refinance your home?
Your tax refund could go a long way to fund renovations which will add value to your home’s worth.
But don’t just take on any DIY project and hope it works. Research which renovations and upgrades will increase your home’s appraisal value and which you should pass on.
Upgrading kitchens, bathrooms, basements, and curb appeal are all excellent choices to raise the resale value. Same goes for structural upgrades like a new roof, A/C, or plumbing.
#7. Contribute To Your Kid’s College Fund[Save for college]
Loads of inquisitive minds still need to take out a public or private student loan despite their guardians’ best efforts to save for college on their own.
A single tax refund may not be enough to pay for tuition, books, or living expenses. But if you invest it as soon as your kids start preschool, you may not need to borrow so much when they’re university-bound.
#8. Donate To Charity[Contribute good karma]
When you can’t donate your time, you can share your wealth with causes that matter most to you. Contribute your entire tax refund to one foundation or split it up to help multiple charities doing good.
Besides the warm and fuzzy feelings, you’ll also score a tax write-off.
#9. Treat Yourself Like An Investment Opportunity[Level up your life]
Use your tax refund to invest in yourself and you may be earning more money come next tax season.
Spend your refund on higher education classes, job training, work-related conferences, memberships to organizations in your field, and more.
You can also invest in new software, equipment, subscriptions, and other tools you need to gain an edge over your competitors.
Bonus: You may be able to write off these purchases if they’re made solely to better your career game.
#10. Abide By The 10% Rule[Spend it on smiles]
Research shows people are happier when they spend money on experiences instead of on material junk[*].
So before you choose one of the first nine tips, route 10% of your tax refund to something that will make you smile, build memories, and bring happiness.
In the end, as long as you have a plan for your tax refund and don’t spend it carelessly, it will be the best “found money” you’ll spend all year.
And if you choose one or a few of these tips, it may even set you up for years of success.
But don’t thank Uncle Sam for these financial wins — thank your smart planning.