It’s that time of year again. It’s tax season! For some, it can be a dreaded time when sending in a tax return also means sending Uncle Sam a sizable check. But for others, it can mean an unexpected payday. The average tax refund in 2017 was $2,763, according to IRS estimates, so Americans can expect a similar refund if no major changes occurred. Before you run out to spend it all, take a moment to think about what you really need. Here are some money-savvy ways to spend your refund.
Want to see how much you may get for 2018? Check out our financial calculators!
Pay off your debts (or start, at least)
The only way your debt will go away is by paying it off. Be sure to take advantage of your tax refund to pay off lingering balances or make increased payments on your credit card or student loans. Paying more than the minimum balance can save you hundreds, if not thousands of dollars in interest. For example, if you have a balance of $1,000 on a credit card with 18% APR (annual percentage rate), you’ll pay $863 in interest over eight years by only making the minimum payment of $20, the Federal Reserve’s calculator shows. Increase payments to $100 a month, and you’ll pay off the balance in 11 months with only $92 in interest.
Paying off your debt can also help improve your credit score. Your debt to credit utilization ratio accounts for 30% of your total credit score. When you go to apply for a home or car loan, you’ll be much better off without that debt.
Upgrades to your home can add significant resale value to your house, especially updates to your kitchen or bathroom.
But keep in mind that a renovation doesn’t always have to mean knocking down walls. Adding a colorful tile backsplash or switching your countertops from laminate to granite or quartz can be a quick way to give your kitchen an updated look. Remodeling projects can also be as small as painting your cabinets and swapping out hardware. Home improvement stores sell kits to refinish your cabinets for roughly $50-$75. Throw in some new cabinet hardware at a few dollars apiece, and you’ve got a practically new kitchen.
Make a down payment on your future
While it’s tempting to spend your refund on a short-term fix, the extra cash gives you an opportunity to invest in your future. Instead of leaving your refund in your checking account, which usually won’t earn any interest, opt for a certificate of deposit or mutual fund. These types of investments involve little-to-no risk, but still can earn much higher yields than a checking account.
You can also use your refund to start contributing to your employer-sponsored or individual retirement account. For 2017 and 2018, the IRS allows people to contribute up to $18,000 from their salary to a 401(k) plan. Be sure to take full advantage of your plan, especially if your employer has a matching program.
Or you could use the money for a down payment on a new car! By doing that, you could reduce your monthly payments.
Indulge … a little
You know that vacation you swear you’re going to take? This is the time to do it. You’ve worked hard all year, so it’s OK to treat yourself. Maybe you don’t need that 10-day, all-inclusive trip to the Caribbean. However, you can indulge a bit. In 2018, the average person expected to spend about $1,145 per person on their summer travels. The average tax refund definitely covers that (and then some). That said, your trip doesn’t have to be lavish. A long weekend to sunny locale not too far from your home may be all you need to recharge and stay on budget.
Finding a tax refund in your mailbox (or your account if you opt for direct deposit!) is never a bad thing. Whether you are using it to plan for the future or spend on the short term, be certain to evaluate all your options. The check may be burning a hole in your pocket, but it isn’t going anywhere, so think it through before making a decision. The hardest thing about your newfound wealth may be deciding how to spend it.
We Want to Know: Tell us in the comments below how you plan to spend (or save!) your tax refund!
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