Getting a tax refund is always a bit of good news.
This is some sort of windfall money you can use for just about anything. And this is why it becomes one of the trickiest decisions you will make at the start of the year. For one, this amount is not something you expect. If you do get a refund, there is a small chance you will know beforehand how much you will get in the mail.
There is some information you can get on how much the average refund will be. But the exact figure will always depend on the amount you overpaid. Yes, the reason you are getting a refund is that you paid more than what you needed. There are some experts who are divided on this topic saying you should not give Uncle Sam a free loan. But some people don’t mind if it means getting unexpected money early in the year.
According to the IRS, the average refund for 2022 would be around $2,400. This tax refund is pretty big already considering the challenging few years people had to go through. It is quite easy to blow off the entire thing simply because you did not expect to have it. Add the fact that you might have been holding back on personal purchases which put your refund in danger.
This makes it all the more important to be more cautious in using your refund if you do get one. It is easy to get lost in the moment and splurge the whole amount in one go. It is tough to sit back and remind yourself that you can use the money to help you improve your current financial situation. Here are a few smart alternatives to using that money.
Boost your emergency fund
If there was one glaring personal finance lesson that the pandemic brought to everyone’s attention, it was the importance of your emergency fund. Many people believed that the lock-downs then and the order to stay indoors would only last a few days or weeks at the most. But it dragged on for a far longer time than that.
As a result, people were forced to rely on their emergency funds. This is one of the reasons why it is always a good idea to use a good portion of your tax refund to strengthen your emergency money. You never know what tomorrow will bring. Take the health crisis for example where people did not expect it to last for a few years. It is good though that a Federal Reserve survey showed that about 68% of American households could cover a $400 emergency in 2021.
This is why it makes sense to add to your reserve funds anytime you have the chance to. So the next time a crisis comes your way and your income is affected, you can dip into your emergency money to tide you through tough financial times. The bigger your reserve fund is, the longer it can cover your expenses until you financially recover.
Use your tax refund to cover high-interest payments
Even before the pandemic, high-interest debt was already a big problem. In most cases, this was because of credit card debt. A lot of people seem to forget that credit cards have huge interest rates. When using your credit card, you are basically taking out a short-term loan from your creditors. And with any loan, it normally comes with interest and fees involved.
However, if you pay the whole thing on or before your due date, lenders would usually let go of interest and fee payments. But this is easier said than done. The number one reason people use their credit cards to pay for purchases is the fact that they cannot pay the amount in full. Credit cards allow consumers to pay installments on purchases but once you do, lenders could start adding interest
And the interest rate for credit cards is some of the highest you will ever encounter. It is the reason why you need to prioritize credit card payments. You are losing a lot of money by paying high interest to lenders. If you have the chance to pay it down or pay it off completely, then you get to save money in the long run.
Stronger retirement money
The best time to start saving for retirement was from your first paycheck. The second best time is now. And if you want to have a more reliable nest egg when the time comes, you need to be smart in saving up for it. Apart from starting early, frequency is also a big factor in how much you will have when retirement comes around.
If you are using compound interest to your advantage, you already know that if you save a bigger amount, the higher the interest savings could be. One tip to help you save for retirement, or any other type of fund is to think about saving money as if you are paying a lender. This can help you set money aside much faster.
If you pay a lender, you don’t think about the money you have paid. You will not try to get that money back since your lender already has it. If you start saving money for retirement, try to take the same approach. Once you have set the money aside, try not to think about it and just keep on adding to it. You will soon realize that you have strong retirement money and might even be able to retire earlier than expected.
One of the ideas for how you can maximize your tax refund is to set aside an amount to help you address renovation or much-needed repairs at home. For one thing, getting in front of small repairs can help you prevent huge costs in renovation later on. If you do not fix that small leak under the sink now, it could into a huge problem. Pipes could burst and you might have to deal with water-soaked flooring and carpets later on.
That small problem on the roof might make you spend more than what you can afford when it suddenly caves in and causes huge damage to your house. Even car repairs should be done as early as possible. In some cases, maintenance is also a good way to get ahead of potentially big repairs.
Indulge a little bit
Are you on track with your financial goals? If you are, it might be a good idea to use a part of your tax refund as well to indulge a little bit. You can go out for a nice dinner or even buy a new pair of shoes. What you need to remember though is to not spend the whole amount. Much worse, spend more than what you are going to get in your refund.
Your tax refund is a great opportunity to help you strengthen your finances if you can use it wisely.