Tax season is here which means that you may get an Income Tax Refund! If you’re one of the 100.4 million Americans that received a tax refund last year, you probably expect to get that extra bit this year as well. This is exciting! Who doesn’t love extra cash? But what do you do with it once it’s deposited? I’m going to share the 5 best ways you can use your income tax refund.
The average tax refund in 2019 was a little under $3,000, with the total tax refund payouts equaling $274 billion [source]. For some families, that’s close to a monthly income, a credit card balance, or a fun family vacation. So how do you decide what do to with this suddenly found money?
What Are the Best Ways to Use Your Income Tax Refund?
Let’s put this in perspective a little – the total US Credit Card debt is around 1 trillion dollars [source]. So, in a perfect world, if everyone just put their tax refund towards paying off their credit cards, it would take around 3 years to pay off all US credit card debt. All of it.
How can I use my tax refund wisely?
Square one for any budget is setting up an emergency fund. In my opinion, this is even more important than paying off your debt because having a fully-funded emergency fund is a safeguard that will keep you from using your credit cards in the future.
While there are many ways to acquire your emergency fund without a second job, you can fast-track the whole process with your tax refund. One huge trick to making an emergency fund work is to keep it completely separate from your other money. This means (1) keep it out of your checking account so you don’t accidentally spend it. And (2) keep it separate from your normal savings account so it’s actually there when you need it.
A note about your emergency fund: since the idea is using this money in an emergency, it means you need quick access to this.
If the thought of investments confuses or overwhelms you, that’s ok. If the thought of saving for retirement just discourages you, don’t worry. Roth IRA’s are a simple, but amazing way to help set you up for retirement! And when you use your tax refund to help, it will be pretty painless.
- They have a good interest rate so you can see growth on your investment.
- It is Tax-Free!
- You might have to pay a penalty if you pull it out before retirement age. This is a good thing! It encourages you to leave that money for your later years when you’ll really need it.
Should I use my tax return to pay off credit cards?
Getting free from debt is a building block to planning a brighter future. It’s unfortunate that so many Americans graduate from college with more than a degree, they get the added bonus of being saddled with debt. We can all do the math. Between school loans and credit cards, many of us look back and realize we’re in a pickle.
Don’t get crushed by it. It was never the plan for your life to be crushed under debt. Start taking steps to push back! Use that tax return as a little push to get you started. I would start your debt payoff with your lowest balance first and work from there up to the higher balances. This will reduce the number of cards you have to keep track of and encourage you to keep going.