The IRS says about three in four Americans receive refunds each year and the average refund amount is around $2,900. That’s a lot of money that you can spend, save or invest.
Spend it wisely
If you’re going to spend it, then spend it wisely. You can start by paying down expensive debt, such as credit card debt. Financial advisors universally rank getting rid of credit card debt as one of the best ways to spend your tax refund.
You could alternately spend it on any kind of maintenance project—on your home or auto repairs—that would otherwise cost you even more money down the line if you put the expense on a credit card or had to dig into savings.
If you haven’t had a health or dental checkup, now may be a good opportunity. Also, putting the money toward insurance if you don’t have health, life or disability coverage can help protect your finances in the long run.
Save it for emergencies
You could also save your refund by building up emergency cash reserves. Most financial advisors recommend building enough reserves to last you six months should a crisis arise.
Consider saving it for your children. Open up a 529 plan so when it comes time to send your child off to college, the burden will be more manageable.
There are many ways to allocate your tax refund. Just keep in mind that it is not “free money.” It is your hard earned income and you’ll want to put it towards improving your financial life.
Invest your tax dollars
Securing your retirement is one of the best investments you could make. Invest in yourself by increasing your contributions to your 401(k) or IRA.
If you’re 50 or older, use the refund money to help fund a “catch-up” contribution if you have been unable to do so before.
If your retirement is in good shape, then invest it in your career. Maybe it’s time to start that side business you’ve always dreamed of or take a college course or specialized training to advance your career.
And If you don’t know where to invest the refund money right now, park it in a money market account. Let it earn interest (even if it’s just 1 percent) while it’s just sitting there.
Your goal should be to maximize your refund by investing it in something that will give you a reliable return.