Looking forward to getting a tax refund? According to the IRS, the average refund so far for the 2020 tax season is $2,549. If you’re like most people, that may be the biggest financial windfall you’ll get all year.
While it may be tempting to blow your check on vacation or splurge on new clothes or the latest devices, using your tax refund thoughtfully can help secure your finances and set you up for a better year.
10 ways to use your tax refund wisely
For the 2020 tax year, the IRS began accepting and processing tax returns on February 12, 2021. This year it’s especially important to file your taxes as soon as possible since it could affect your eligibility for stimulus checks.
If you’re expecting a tax refund, come up with a plan for the money ahead of time so you don’t risk spending it on non-essentials. Here are 10 smart ways to use your tax refund to improve your finances:
1. Build your emergency fund
Many people don’t have an emergency fund and many of those who did saw their savings depleted after 2020. If your emergency fund is a bit low right now, deposit your refund into a separate high-yield savings account that is only used for emergency expenses. Your tax refund can give you a financial cushion and help protect you in case the unexpected happens.
2. Pay off high-interest debt
If you have high-interest debt, such as outstanding credit card balances, you could pay far more than you originally spent due to interest charges. By using your tax refund to make a lump sum payment toward your credit cards, student loans, or medical bills, you can reduce the interest that accrues and pay off your debt faster.
3. Contribute to your retirement savings
The U.S. Government Accountability Office reported that 48% of households headed by someone aged 55 and older had no retirement savings at all. If you fall into that group, you can better your finances by using your refund to make contributions to an Individual Retirement Account (IRA).
Investing in a retirement account can pay off over the long term. For example, if you’re 45, deposit your $2,500 refund into an IRA, and earn an 8% average annual return, your account will be worth $12,317 by the time you reach 65.
4. Cover medical or dental expenses
If you have a high insurance deductible or don’t have insurance coverage, you may have put off visiting a doctor or dentist. However, delaying medical and dental care can cause bigger — and more expensive — issues later on.
Consider using your tax refund to pay for medical or dental preventative care, such as annual physicals, bloodwork testing, or dental cleanings.
5. Get your car serviced
With a long list of to-dos and things to remember, car maintenance may have slipped your mind. However, proper car care and maintenance can prevent more costly repairs later on and can even improve your car’s fuel efficiency.
Use your tax refund to get your car’s scheduled maintenance done, and consider replacing your tires if needed.
6. Replace outdated appliances
If you have old or faulty appliances, using your tax refund to purchase new and more efficient appliances could be a smart idea. Switching to an energy-efficient washer, dryer, refrigerator or water heater may even help you save money over time.
7. Invest in your child’s education
If you already have a solid emergency fund, save for retirement each month and don’t have debt, you can use your windfall to invest in your child’s college education. By tucking money into a 529 savings plan, you can help reduce your child’s need for student loans later on.
8. Open a brokerage account
If you’ve maxed out your retirement accounts or want to invest for other goals, open a taxable investment account with a brokerage firm and invest your tax refund in stocks, bonds, mutual funds, or exchange-traded funds. Over time, your money can grow, giving you even more value from your refund.
9. Make a donation
If you’re in solid financial shape, think about using your refund to help others. Due to the coronavirus pandemic, millions of people have lost their jobs. Non-profit organizations like food banks, utility assistance groups and homeless shelters have experienced unprecedented demand for their services, so your money can make a substantial impact. Not sure where to donate? Check out the Charity Navigator, a site that evaluates charities’ spending, operations, and program results, to find reputable charitable organizations.
10. Treat yourself (a little)
After a tough year, you deserve to treat yourself; however, you should do it in moderation. A good rule of thumb is to set aside 10% of any windfall for splurges or fun experiences and use the rest for investing, paying off debt, or other financially sound ideas. If you receive a $2,500 refund, that means you could spend up to $250 on new clothes, a computer monitor, or tickets to a local event using that guideline.
Improving your finances
If you are supposed to receive a tax refund this year, spend some time coming up with a plan for using your money. If you use it wisely, you can pay down debt, build your savings and even have a more secure retirement.
To see how your tax refund can affect your finances, use SouthEast Bank’s investment calculator to find out how much your refund could be worth if you invested it in a brokerage account or IRA.*
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
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