According to IRS statistics the average American family receives an annual tax return of around $3,000. While that’s not exactly a life-changing sum, it is enough to shore up your financial situation quite a bit if you use the money wisely.
While many people treat their tax return as found money and quickly blow it all on a family vacation or big screen television for the family room, money-savvy folks know there are much better ways to put that money to use.
Here are 7 smart things you can do with your tax return:
1. Start an emergency fund. Most people don’t have any emergency fund at all and if you’re one of them you could be in trouble if you suddenly find yourself out of work or besieged by unexpected expenses. Set aside your tax return to start an emergency fund or add to one you already have. I like to keep my emergency fund in an online savings account with Capital One 360. I can access it quickly if I need to and it earns a little bit of interest too.
2. Pay down your debt. If you’re deep in debt, your tax refund may just be a drop in the bucket compared to what you owe. But if you have an opportunity to at least put a dent in your credit card debt you should do it. Think of it this way: you’re guaranteed a return equal to the interest rate on your card.
3. Make a principal-only payment on your mortgage. If you can manage to do this once a year you’ll pay off your mortgage years early and save tens of thousands of dollars in interest. Just make sure you tell your lender to apply the entire amount to principal or it will be treated as a regular payment with only a portion going toward paying down your principal balance.
4. Start a college fund for your kids. Let’s face it…college isn’t cheap and it’s getting more and more expensive every year. Take your tax return and open up a 529 plan to help cover some of those expenses when your little ones are older.
5. Sock it away for retirement. Open up a Roth IRA account for you or your spouse (or both) and deposit your tax return so it can grow tax-free until you’re ready to retire. Roth IRAs are great because you can withdraw your contributions at any time without penalty, and as long as you follow the rules you won’t ever have to pay taxes on your earnings. Learn more and open up a Roth IRA with Scottrade today to get started.
6. Use it to improve yourself. Take a class and learn something new. It’s important to invest in yourself…improve your skills and make yourself more marketable. Many fields have certifications or designations that can help you get a raise or a promotion to the next level. Or you can learn a new skill or trade and use it to earn money on the side.
7. Send it to me as a gift! I’m just kidding…I’m sure I could put your tax refund to good use but you’re better off using it to improve your own financial situation.