Wait! There are better ways to spend your tax return
Three smarter ways to spend big and small refunds
By Megan Guinane
Tax season is upon us.
After surviving the stress of figuring out what you even need to file your taxes, it’s only a matter of weeks until you finally get that sweet surplus of cash. Last year, the average American’s refund was around $2,860. With that extra padding in your bank account, it’s tempting to start looking at an all-inclusive vacation to Antigua (you deserve it!) or finally give in and get that 70” Smart TV for your living room.
Our advice: stay strong and get creative. Don’t let yourself be enticed by companies trying to lure you into spending your whole return in the home appliance department. We’re not here to tell you exactly what to do with your money, but we do have some tips (large and small) on how to utilize your return for something meaningful in your distant and not-so-distant future.
1. Buy some peace of mind.
Large Return: Take some time to figure out the cost of living for the next 180 days. Consider your monthly expenses such as rent, groceries, transportation, etc. With that information, build a fund that you could live off of for 180 days. Keep these funds in a liquid account such as a checking account or a simple savings account that has a small minimum balance requirement. Here’s some more info on how to get started.
Liquidity means how accessible the funds are at any given time. You would not want to keep an emergency account in a Certificate of Deposit (CD), from which you can only withdraw money after a certain amount of time.
Small return: It’s tough to start thinking about Christmas and holiday shopping already, but wouldn’t it be nice to have that extra cash ready and waiting when the time does come? Putting a few hundred dollars away means less stress come next winter, and more time to enjoy the holidays. This kind of sub-savings account can even be started within your existing savings account.
2. Eliminate bills.
Large return: If you are one of the 44 million people (like us!) who have serious student loans to pay back, you know how hard it is to whittle away that high-interest debt. When you take the money earned from your tax return and apply it to your current balance, you are relieving yourself of some of the interest that rapidly builds up over time, ultimately putting you one small step closer to becoming debt-free. The money you would have been paying toward loans can now be put safely into your savings.
Another meaningful way to use a chunk of change like a tax return is to eliminate current consumer debt (credit cards). If you can pay off one balance in total it will help you keep more organized on a monthly basis with one less bill to keep track of. Alternatively, consider paying off your highest interest balance first.
Small return: Prepay your gym membership. The total cost is often much smaller when prepaid for the year instead of on a monthly basis, saving you hundreds. Plus, no more excuses!
3. Invest in your future.
Large return: Adding to your 401k in your 20s can build you hundreds of thousands more than if you start later in life. If you are currently enrolled in a 401k plan, consider doing your 65-year-old self a favor and start saving for that beach house now.
Small return: Take a course at your community college. If there’s something you’re interested in, or could help you get ahead professionally, consider using this money to invest in your education. Be sure to check with your company’s tuition reimbursement plans — you may even get the money back at the end of the semester!
Having that little cushion arrive in your bank account can tempt you to splurge on fun trips or products that are not usually in your budget. However, there are many ways you can multiply those funds into something beneficial for both the present and the future. Instead of researching “cheapcaribbean.com” (yes that actually exists, and yes they are comically cheap), spend some time assessing your financial situation. Future You will thank you!
