Your tax return may feel like surprise money, but it’s money you earned. Now that it’s back in your wallet, don’t go spending it without first evaluating your financial circumstances.
The average federal tax refund is $2,727, and it’s even higher in states like California and Arizona. That’s a pretty nice chunk of change, so instead of blowing it on a dream vacation or new car, why not spend it on something that can help you in the long run?
This doesn’t mean you can’t spend your refund on something fun. You can—if you’re hitting your money goals. Keep reading for our tips on smart ways to spend your tax return.
1. Start or Build Up Your Emergency Fund
How would you handle it if your car’s transmission blew or you unexpectedly lost your job? It doesn’t take much to send someone into a debt spiral, which is why many finance experts recommend an emergency fund of anywhere from three to six months’ worth of living expenses in a savings or money market account. Squirreling away that much money takes a lot of time if you’re only taking a little bit out of every paycheck, so depositing your tax return—even if it’s just a portion of it—will be a significant contribution.
2. Pay Off High-Interest Debt
Nothing puts a strain on your financial health quite like high-interest debt, especially in the form of credit card debt. Aside from building up an emergency fund, the next best way to spend your tax return is by putting it toward outstanding credit card debt. Paying off debt is one of the smartest investments you can make with your refund.
3. Add It to Your Retirement Fund
Use your tax return to boost your retirement savings by depositing it into a Roth or traditional IRA. The importance of saving for retirement cannot be overstated; someday, you’ll be thankful you decided to save for retirement instead of spending it on something frivolous.
4. Put It Toward the Future
Do your children or grandchildren a favor by contributing your tax return to an IRA or college fund in their name. Starting an IRA with a good interest rate early on can eventually produce an impressive nest egg, and a 529 plan, for example, can help them graduate from college or post-secondary training with less debt.
5. Purchase Life Insurance
Think of life insurance as a financial safety net that can help your loved ones maintain a standard of living should the unthinkable happen. If you’re young and healthy, you may never have even thought about life insurance. However, if you’re newly married or have a family, you may want to consider getting a policy to protect the people you love. Plus, life insurance is relatively affordable.
6. Put It Toward Something You Really Need
There are everyday expenses, and there are expenses you plan for. Are you planning any big purchases in the next year or two? Maybe you’re planning on getting a new car, or your kid needs braces, or three of your closest friends are getting married in three different parts of the country. Your tax return could help fund these expenses.
Better yet, why not tuck those funds away in a high-yield online savings account? Many banks offer 2% interest and low minimum-balance requirements. Since it’s separate from your checking account, you won’t be as tempted to spend it on everyday expenses, and your initial deposit will grow thanks to compound interest.
7. Pay Your Mortgage
Why not use your tax return to make an extra payment on your mortgage? So much of your monthly payments on a long-term loan goes to interest; paying off the principal can help shave years off of the life of a loan. Just be sure to verify with your mortgage lender to see how extra mortgage payments are handled. Some lenders permit customers to make additional payments for free, while others charge a fee.
8. Make Home Improvements
Your tax refund could be well spent on a repair or upgrade around your home, like new windows or appliances that can help reduce your energy bill. Your refund could also help you feel less of a pull on your purse strings if you’re hoping to fund other big projects, such as a new roof or hardwood floors. You’ll improve the feel and functionality of your home, and make it more appealing if you ever decide to sell.
9. Fill Gaps in Insurance Coverage
Now that you have a little extra money in your pocket, revisit your insurance policies and see if you can fill in any gaps in coverage. For example, you could add personal umbrella insurance to your homeowners or auto insurance policy. It’s extra liability insurance designed to protect you from claims and lawsuits, and keep your future intact.
Say you’re held at-fault in a car accident, and the cost of the injuries you cause to others involved totals $400,000. Your auto insurance policy’s bodily injury limit will cover $200,000 of the injuries. But who’s going to cover the remaining $200,000? Your umbrella policy will cover the amount above your policy’s limits, up to the limit you choose for your umbrella policy.
And with rainy season approaching in states like Arizona, you could use your tax return to increase your homeowners insurance coverage and take preventative measures against costly storm damage, like paying to have your trees trimmed.
At Personal Express Insurance, we can help you determine your insurance needs and create an auto, homeowners or renters insurance policy that fits your needs and budget. Visit your local office or call 1-800-499-3612 to speak with a Homegrown Pro near you.