So you’ve netted a tax refund — congrats! For 2015 taxes, the average tax refund was $3,218, to be exact. That’s quite a wad of cash. But remember, a tax refund is really just your hard-earned income that’s been deferred for a short time. So, before you go on a mini spending spree, here is a list of the best ways to use your tax refund to give your money-growing goals a boost:
Kickstart a couple savings goals with the cash
We all need a place to start and having specific goals in mind helps provide both long-term vision and short-term motivation. Setting clearly defined savings goals enables you to see progress and take pride in accomplishments. It also helps you organize your time and resources so that you can spend more time enjoying life vs. stressing out about your financial situation. Set a savings goal and fund part of it with your tax refund. It will help you kick start the healthy habit of setting financial goals and achieving them.
How to start:
Write down 10 savings goals that are most important to you. Divvy them up by short-term and long-term goals. Get specific as possible. For instance, short-term goals may take anywhere from a few months to a couple of years to achieve. They might include buying a new set of wheels, going on a backpacking trip to Europe, or maybe sprucing up your digs. Long-term goals might take several years to hit, such as saving for a down payment on your first home or raising a family.
Next, pick just one short-term goal and one long-term that you want to make serious headway on. This might be the thing that you’ve been putting off or would really help add value to your life. Keeping focus by choosing just one thing from each list, and use your tax refund to infuse some cash into these goals. Getting a solid start will give you the motivation mojo to keep saving. It’s one of the best ways to use your tax refund.
Open a new savings account
Now that you’ve figured out what your savings goals are, open an account to help you make steady progress. You can think of your savings account as a hub of sorts for your moola: to transfer to other savings accounts, or stash money it into another goal down the line.
How to start:
Consider opening a free savings account with a bank that automates your savings and helps you keep up healthy financial habits. If you’re a Chime member, opening an Automatic Savings Account allows you to grow your savings by just simply using your card and you never having to worry about getting dinged by banks charging you fees. Every time you swipe your Chime card the purchase is rounded up to the nearest dollar and is safely stowed away in your Savings Account. Plus each Friday Chime gives you an extra 10% bonus. And who doesn’t love free money?
Stash away your refund in a tax-sheltered account
While it’s quite tempting to use your refund to splurge, one of best ways to use your tax refund and make that moola grow is to hold onto it for a while. Luckily, Uncle Sam encourages long-term growth through a few types of investment accounts.
Through the magic of compound interest, funneling your refund into one of the following accounts can help multiply those savings. You’ll just need to follow a few simple rules. An added bonus is that stashing some of that money in one of these accounts lowers your tax bracket, and can help when tax time comes around next year.
How to start:
Check out Traditional IRAs and Roth IRAs
Two tax-sheltered accounts you may consider starting with your refund are a traditional IRA and a Roth IRA. Both offer very generous tax breaks, but differ as to when you benefit from those breaks. Traditional IRAs help you avoid taxes when you put the money in, while Roth IRAs help avoid taxes when you take it out.
Traditional IRA contributions are deductible on your tax return for the year that you make them. That means if you roll your refund into a Traditional IRA, you can deduct $5,500 from your return the next year. Note that anytime you withdraw those savings in the future, you will be taxed at the ordinary income tax rate — which is where the Roth IRA differs.
Bear in mind that both types of IRAs don’t offer the immediate gratification of a tax break in the year you make a contribution. However, withdrawals of your contributions are generally tax-free at any time. For both types of IRAs, if you’re under 50, you can put away up to $5,500 for 2017, and up to $6,000 if you’re 50 and over.
Check if your health plan offers an HSA
If you’re on a health plan with a high deductible, another account you can put money into is a health savings account or HSA. Like a traditional IRA, an HSA is a pre-tax account, so is tax deductible. A major bonus with HSAs is that you can use it as means to invest in stocks. That’s right, it can be used as an investment vehicle. The maximum amount you can contribute in 2017 for HSAs is $3,400 for individuals and $6,750 for families.
Use your tax refund to boost your rainy day fund
Nobody is immune to the uncertainty of life. While things may be fine in the here and now, in the near future you may suffer an injury, one of your tires may go flat on the highway, or hours at your job might get scaled back. A rainy day fund will help you get back on your feet when life throws a curveball your way.
How to start:
While the recommended amount is anywhere from 3–6 months of basic living expenses, only you know what you’re comfortable with. If you’re not sure how much you need, check your bank’s transactions for the last few months, or use an app such as Chime, Mint or Level Money. Consider stashing a little more into your emergency fund in case of the unexpected.
If you don’t have the time to analyze your spending, start with $400. You will be ahead of 47 percent of Americans and will be prepared to repair the dishwasher when it breaks, and cover out-of-pocket medical expenses if you injure yourself on the slopes.
Pay off debt
Debt can feel like a heavy weight, keeping you from living the life you really want to have. And you fully know that the sooner you pay it off, the quicker you can focus on other savings goals. Plus, avoiding those hefty compounding interest rates will save you money in the long run. So consider using some of your tax refund money toward paying off some of that dreaded debt!
How to start:
If you have different kinds of debt, to figure out which one to pay off first, look at the total amounts owed and terms such as the interest rate, payment period, and so forth. Two popular ways of paying off debt are the avalanche debt method, which is when you pay the debts with the highest interest rates first; and the snowball debt method, where you pay off the debts with the lowest amounts first. The pros of the avalanche are that it will save you money in the long run, while the snowball method is that you’ll net quicker wins, which could be a huge motivator.
If you’re going to splurge…
Buy something that adds value. You won’t be committing a money cardinal sin by spending some of that tax refund on a purchase. Just make sure it’s something that you’ll 1) actually use, and 2) adds value to your life. Maybe you’ve been eyeing that fancy blender to make your breakfast smoothies or go to a mega music festival like Coachella this year. Or you want to buy a digital camera to take awesome, professional pics.
To curb impulse buys, exercise your delayed gratification muscle. I keep a 30-day list on my phone and wait it out a month or so to see if I really want or need a certain item. I have a friend, Jen, who will physically walk into a store or three times before buying something.
While you most likely aren’t hurt for ideas on how to spend your tax refund, remember that the best way to use your tax refund is to put it toward goals that will grow your money and give you deeper pockets. You’ve already paid Uncle Sam, now it’s time to pay yourself.