Each year, the average American family receives a tax refund of about $3,000. Remember that’s just an average. Some people will receive more than that and others less.
No matter how you look at, if you do receive the average tax refund of $3,000 you have an opportunity to improve your finances. You can start by reconsidering your tax withholding and filing a new W4 form so less money comes out of each paycheck you receive throughout the year. After all, that is your money and all you’re doing is loaning it to the government interest free.
Now let’s talk about some smart things you can do to make the most out of your tax return…
Pad Your Emergency Fund
The furnace dies on the coldest day of the year. Your daughter falls off the monkey bars and breaks her arm. Your dog eats an entire chocolate cake (including the plastic cake carrier it was stored in). Unexpected expenses like these happen to everyone at some point and if you’re not prepared you’re likely to go into debt trying to pay for them all.
The time to prepare for an emergency is before it happens. Consider using your tax refund to start or pad your emergency fund to cover the unexpected expenses that are bound to happen sooner or later. You’ll want to keep the funds somewhere liquid like a high yield savings account at Ally. This way you’ll be able to access it easily in an emergency while also earning some interest.
If you have high interest credit card debt, one of the best moves you can make is to pay that debt down. Think about it…if you’re being charged 19 percent interest on a credit card and you pay it off that’s like earning 19 percent interest on your money. You’d have a hard time matching that return anywhere else.
Open a Roth IRA
If you’ve been meaning to start investing but can never seem to find money to invest, now is your chance. Take your tax return and open up a Roth IRA with a discount broker or a mutual fund company. Vanguard and Fidelity are both popular options that offer low-cost index funds which are perfect for the average investor.
Start an Investment Account
If you don’t qualify for a Roth or if you prefer the more hands on approach, you can still open up an investment account with an online broker like Scottrade or Sharebuilder. Put your money into stocks, mutual funds, ETFs and more so you can start building wealth and increasing your net worth.
Make a Principal-Only Mortgage Payment
Your mortgage is likely the largest amount of debt you have. The interest rate should be pretty low, so it makes more sense to pay down high interest debt first. But if you have the cash to spare you can make an extra payment and have it applied entirely to principal. Get in the habit of doing that every year and you could pay off your mortgage years earlier than the typical 30 year term while saving tens of thousands of dollars.
I’m a big believer in lifetime learning and I’m always looking to learn a new skill. You can learn a lot for free just by reading if you take advantage of the internet and your local library. But there are times when free materials aren’t enough or you need to take a class or two.
You can learn something just for fun (learning to speak Italian is on my to do list) or concentrate your efforts on learning something that will increase your earning power. For example, earning new certifications will make you more valuable and your employer may offer you a salary increase each time you complete one.
Start a College Fund
With tuition costs skyrocketing ever higher, it is never too early to start a college fund for your little ones. You can receive tax benefits if you stash money away in a 529 college savings plan. Money from a 529 plan can be used to pay for tuition, books, fees, supplies, and equipment required at any accredited college, university, or vocational school.
Do Something You’ve Been Putting Off
Maybe your roof has a few minor leaks or you have some dental work that you’ve been putting off because you never have the extra money put aside to do it. Now is the perfect time to take care of these types of things while you have the money in hand.
Build a Sustainable Backyard Garden
It never ceases to amaze me how much food my family of five goes through, and my kids are still little. I can’t imagine what the food bills will be like when they’re all teenagers!
Our new house has a nice corner that gets tons of sun so we’re planning on building a little garden back there to grow some fruits and vegetables. We’ll start small by growing some fresh basil, tomatoes and a few herbs. There’s nothing fresher and more delicious than growing your own fruit and veggies and it can also save a ton of money.
Create a Memory
Studies show that people enjoy more enduring happiness from their experiences than their possessions. Splurging on a new flat screen TV might make you feel good for awhile but that happiness will fade rather quickly as you see newer models with screens that are bigger and clearer than your own.
On the other hand, experiences become a part of you. I still remember driving up to Niagara Falls with my then girlfriend (now wife of ten years) for our first vacation together. We took a day trip into Toronto and I enjoyed one of the most delicious burgers ever at a restaurant across the street from the Hockey Hall of Fame.
I also think back to our honeymoon in Aruba and I’m glad we were able to see and walk along the natural bridge before it collapsed. That is an experience I’ll never forget and I can’t put a price on it.
While many personal finance blogs would shocked and dismayed at the thought of actually spending your money on something fun, I prefer a more balanced approach. We can’t just hoard all of our money and not have a little fun with it (within reason). So if you have some extra money and you want to create an experience to share with your family for years to come, I say go for it.
Help Someone in Need
As you stand with your tax refund money in hand wondering where to spend it all, take a moment to think of people less fortunate than yourself. There are a lot of people struggling in this world and even a small contribution can do a lot of good.
Here in New Jersey there are towns only 5 minutes from my house that were ravaged by Hurricane Sandy. We took a ride through some of the accessible neighborhoods and were left speechless by the devastation so close to home. We saw fence posts around what used to be someone’s house but is now just an empty lot. Furniture, toys, and entire lives were destroyed and left sitting on the curb. It broke our hearts to see people suffer like this, so we’re going to donate a portion of our tax return to help the victims of Hurricane Sandy.
How much did you get as a tax refund this year? What did you decide to do with it?