9 Smart Ways to Spend Your Tax Refund
Article Published by: nerdwallet
You know those articles that offer good-for-you advice about what to do with a tax refund? This isn’t one of them.
At least not entirely. With the average taxpayer raking in a refund of more than $3,000 this year, we feel obligated to at least touch on the standard eat-your-vegetables advice before we launch into the juicier stuff.
A check from the IRS offers most of us a chance to do something financially meaningful. But meaningful doesn’t have to mean boring. Here are nine ways to get the most out of your 2016 tax refund, presented in order of obvious (getting your financial house in order) to awesome (fun and financially fruitful).
1. Buy your financial freedom
There’s no bigger drag on your bottom line than lugging around high-interest debt — typically credit card debt — with interest compounding against you month after month.
If you have credit card debt, paying it off is the best investment you can make with your tax refund. Doing so delivers a guaranteed return on your money equal to the interest rate you were paying your lender.
If your refund doesn’t cover the entire outstanding balance, look into rolling over your remaining debt to a balance transfer credit card with a lower interest rate. If your credit isn’t good enough for that, look for a lower-interest debt consolidation loan.
If you have outstanding high-interest debts, stop reading now and start crafting your debt payoff plan. If your tax situation is likely to be the same next year, look into adjusting your current withholding so that you have access to the money to pay down debt right now instead of giving Uncle Sam an interest-free loan all year.
2. Get peace of mind
There’s no better sleep aid than knowing you’ve got the cash on hand to cover unexpected expenses (four flat tires, flooded basement) and income-hampering events (a cut in work hours, disability or sudden job loss). Ideally, you should aim to have enough in your emergency fund to cover three months of must-pay living expenses. Earmarking a portion of your tax refund to the cause will give you a head start on building up your financial fortress.
3. Super-size your shopping money
Funding the big-ticket items on your 2017 shopping list (new car, tuition, braces, Botox) just got an extra boost thanks to the money the IRS kicked back from your overpayment.
It’s best not to mingle off-limits-until-needed money with your everyday spending cash, because it requires constant discipline to keep from dipping into it for all those “just this once” purchases. Instead, bypass anemic checking account interest rates by tucking the money away in a high-yield savings account. Right now many are paying 1% interest with low minimum-balance requirements.
4. Take $50 and play the lottery (one in particular)
For further incentive to save instead of spend your tax refund, enter the Save Your Refund lottery for a chance to win $25,000.
The promotion, from America Saves and Commonwealth, is designed to encourage people to divert a portion of their tax refund — a minimum of $50 — into a savings account, individual retirement account, bond, CD or Treasury Direct account. Each $50 you sock away buys an entry into the lottery for a chance to win 100 weekly $100 prizes. Submit a photo that represents your savings goal and you’ll be entered for the grand prize of $25,000.
5. Seed your million-dollar portfolio
Want to know how to become a millionaire? Begin with one tax refund at a time. Invest that money and let it grow, and you’ll put yourself on the path to obscene riches — if that’s your cup of tea.
For example, a taxpayer who received the $3,191 average refund in 2010, invested it and earned a 6% average annualized return would have $4,527 in that investment account today. (Side note: The actual average annual return of the Standard & Poor’s 500 index was closer to 11% between Jan. 1, 2010, and Dec. 31, 2016. But let’s let bygones be bygones.)
Earning $1,300 on a tax refund isn’t too shabby, but it gets even better for those who committed to investing their refunds each of those six years and letting compound interest and earnings do their thing: They’re sitting pretty with $28,121 from savings and interest. Flash forward 20 years and the disciplined savers who continue to invest their $3,191 tax refund every year for two decades — for a total of $63,820 invested — earning a 6% average annual return is looking at $123,847. That’s double the total amount invested.
Make 2017 the year that you get on the path to becoming a millionaire. You have until April 18 to open and fund a traditional IRA or a Roth IRA; see NerdWallet’s roundup of best places to open an IRA. File your taxes soon so you can start amassing your fortune.
6. Invest in your ‘human capital’
Another tax refund maximizing strategy is to increase the value of your human capital. That is, invest in yourself.
Think about it: You are your biggest income-producing asset. Your expertise, talent, experience, work ethic and reputation for bringing delicious snacks to office potlucks are all part of what adds value to this asset. And unlike stock market returns and interest rates, you can influence your own rate of return by improving your value in the working world.
Using your tax refund to pay for additional training, tuition, a work-related conference or membership in a professional organization is an investment that can pay off for years to come in bigger paychecks and greater job stability.
7. Repave your yellow brick road
There’s no place like home, and given the price people pay for their split-level ranches, Cape Cods and condos, keeping the place in tiptop shape is a wise use of tax refund dollars.
If you’re planning to put up a “For Sale” sign this year or refinance your home, heed Remodeling magazine’s 2017 Cost vs. Value Report and concentrate on projects where you’ll recoup the highest amount of your investment at resale. According to the most recent report, it’s all about energy efficiency and curb appeal. You’ll recoup 107% of the $1,343 average cost of adding fiberglass attic insulation, 90% of the $1,413 cost of replacing an entry door with a steel one and 89% of the $7,851 average cost of replacing vinyl siding on the street-facing facade with manufactured stone veneer. Here are four other ways to increase your home’s refinance appraisal value.
Not all home improvements are about the bottom line. If a bathroom or kitchen remodel or a new deck would increase your enjoyment of your abode, that’s reason enough to use your tax refund to spiff up the joint.
8. Splurge on a serotonin booster
Sure, spending your tax refund on some new doodad will put a kick in your step — but only briefly. When the buyer’s high fades, you’ll be counting the months until you can blow next year’s tax refund on doodad version 2.0.
A smarter and more satisfying splurge is spending money on an experience such as travel, music lessons or a class on, say, Appalachian looming techniques. Studies show that experiential purchases make us happier — and for a longer period of time — than buying material things. In particular, splurging on experiences that you can enjoy with others, like tickets to a concert or sporting event, will continue to pay out happiness dividends years down the road when you and your buddies fondly reminisce about “that time when….”
9. Buy some good karma
Donating money to a cause you care about is the ultimate tax refund twofer; it not only benefits those in need, but the giver also derives lasting warm fuzzies from making a difference in other people’s lives. Combine charitable giving with volunteer work with friends and family — for an experiential touch — and you have the ultimate do-good/feel-good tax refund strategy, plus a potential donation deduction for next year’s taxes.
Soon Uncle Sam will start licking stamps and dropping IRS tax refunds in the mail — or hitting the “send” key for those who file taxes online. Come up with a smart tax refund strategy before the check arrives, and your future self will thank the 2017 you.
ABOUT MICHAEL SMERIGLIO:
Michael Smeriglio III is a financial specialist. A licensed CPA since 1985, Mike has been providing tax preparation services to individuals and businesses for more than 30 years through his firm located in Greenwich, CT.