The average tax refund in 2017 was $2,782, according to data from the IRS. That’s a lot of cash to get at once.
You may have already started dreaming about ways you could use your refund dollars. But before you start spending, take a step back and consider if there are other ways you can use your refund to improve your financial standing.
To help you get started, here are 10 smart ways you can use your tax refund in 2018.
1. Pay off debt
Americans have $8,195 in retail and credit card debt, according to 2017 data from Experian. What’s more, the Federal Reserve has found that credit cards charge an average interest rate of 14.99%.
If you carry credit card debt, using your tax refund to help pay it down is one of the best things you can do. If you never carry a balance, though, consider using your refund to pay down other debts you have.
Even if you’re paying low interest rates, the less debt you have, the better.
2. Build your emergency fund
Financial experts typically recommend keeping three to six months’ worth of basic expenses in reserve in case of a rainy day. But according to a 2017 report by the Federal Reserve, 44% of Americans don’t have enough to cover even a $400 emergency.
So, while setting a couple thousand dollars aside won’t fully fund your emergency savings, it can go a long way toward giving you a decent safety net and some peace of mind.
3. Set it aside for retirement
You can contribute up to $5,500 per year to an individual retirement account (IRA). If you’re 50 or older, you can add an extra $1,000 per year in catch-up contributions.
Saving for retirement may not be a great choice if you have more pressing needs in the present. But if not, it’s a great way to start your nest egg if you haven’t already. And with the power of the time value of money on your side, the earlier you start saving for retirement, the more your savings will grow in the long run.
4. Make home improvements
Other than your earning power, your house is likely your most valuable asset. And if you plan on selling it someday, renovating it a little could boost the home’s value.
Before you start making improvements, though, keep in mind that some renovations have a better return on your investment than others.
5. Save for your child’s college costs
A college education is more expensive than ever before. College Board data shows that the cost of college has increased annually by 3.2% per year beyond inflation over the last decade.
If those trends continue, the cost of a college education could be beyond your child’s reach by the time they leave high school. So, if you’re thinking about helping your kids pay for college, now is a great time to start.
6. Invest in yourself
If you’ve ever wanted to develop a new skill or invest in your professional development, now is a good time to do it. Not only can investing in yourself this way boost your career but it can also improve your quality of life.
7. Go on vacation
Now, taking an expensive vacation doesn’t sound like it’d be a good way to improve your financial health, but it could be worthwhile.
Taking time off can do wonders for your productivity. In fact, a 2016 report by Project: Time Off found that workers who take 11 or more days off of work per year are more likely to receive a raise or bonus than those who take 10 days or fewer.
Taking time away can help you avoid burnout and rejuvenate you, so you can return to work and focus on your career.
8. Save for a big expense
Whether you’re planning to replace your car soon, want to save for a bigger down payment on a house, or have an expensive medical procedure coming up, your tax refund can help you get there.
More importantly, your tax refund can limit how much debt you go into when it comes time to pay for these goals.
9. Donate to charity
Contributing to a cause you believe in can not only help people in need, but it can also make you feel good knowing you used your money for good.
What’s more, next year at tax time, you may be able to deduct the amount you donated from your taxable income, making it a smart way to “spend” your money.
10. Spread the wealth
The best thing about all of these options is that you don’t have to do just one of them. Depending on what your financial goals are, you can split up your tax refund to work toward multiple goals.
For example, you could set $1,000 aside in your emergency fund, donate $100 to your favorite charity, and use the rest to pay off credit card debt. Or you can mix and match any other goals you might have.
The bottom line
As with any windfall, your tax refund gives you an opportunity to improve your financial health. If you use it wisely, you can end up better off than you were before you received it. But if you spend it on something you don’t need, you could end up regretting your decision down the road.
Take the time to think about how you can use your refund wisely and go with what works best for your needs.
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