How to Make a 16% Return with Your Tax Refund and 6 Other Tips
When you see a big boost from your tax refund hit your checking account, it can be tempting to book a nice vacation, but it’s smarter to do one of these seven things instead.
According to IRS data, last year three out of four taxpayers got a tax refund and the average refund was almost $3,000. If you are fortunate enough to be getting a tax refund this year, here are some suggestions for what to do with it.
Tax refund tip #1: Make a 16% return
The average credit card charges nearly 16% if you carry a balance. That means that if you average $3,000 for your credit card balance all year, you will pay about $480 in interest in one year. Of course, if you took a $3,000 tax refund and paid off $3,000 of credit card debt, you would not pay $480 in interest: a 16% return on your money!
Tax refund tip #2: Do a mini-splurge
When you see that big boost from your tax refund hit your checking account, it can be tempting to book a nice vacation or buy a big-ticket electronics item. The wise thing to do, however, is make sure to cover your needs before wants, so you may need to hold off on all that fun. However, that doesn’t mean you shouldn’t have a little fun. Try taking 5% of your tax refund and do a mini-splurge. Treat yourself to a night out as a reward for being wise with the other 95% of your tax refund.
Tax refund tip #3: Bump up your emergency fund
Personal finance articles regularly report that too many Americans are unable to cover the cost of even a $500 emergency. No wonder payday loan stores are often more numerous than fast food restaurants. If you use your tax refund to grow your emergency savings, you will be prepared when — not if — the next emergency happens.
Tax refund tip #4: Stop lending so much to Uncle Sam
A tax refund is basically a zero-interest loan that you made to the government. It’s your money — the government just over-collected from you for a full year. If your income is pretty stable year to year, you can easily reduce your withholding so that you keep the money instead of lending it to the government. Sure, you won’t get a big tax refund once a year, but you will get a mini-boost with every paycheck that equals the same amount.
Tax refund tip #5: Bump your retirement savings
While you want to be putting away for retirement from your regular income, you can make a nice boost to retirement by adding a lump sum amount. Check and see if a traditional IRA, which gives you a tax break now, or a Roth IRA, which lets your money grow tax free, is the option that will work for you. Someone who invested a one-time $3,000, and earned an average 8% rate of return, could see this grow to more than $70,000 in 40 years — now that’s a tax refund. Here is a calculator you can use to find out how much one-time investments can grow.
Tax refund tip #6: Add to college savings
Many college graduates end up with $30,000 or more of student loan debt by the time they graduate. You can help your child reduce the need for student loans if you save money for their education. Money saved in a 529 plan such as my529.org grows interest-free when the funds are used for educational purposes.
Tax refund tip #7: Fund your side hustle
Do you have a marketable talent or a desire to get some sort of certification that could increase your ability to make money? Why not use that tax refund to follow this dream? The money you make could be many times more than your tax refund.
With any of these choices, you won’t be sitting in a beach chair looking at an ocean sunset — at least not yet. On the plus side, all seven of these options are sure to make your family richer in the long run.
Don Milne is Financial Literacy manager for Zions Bank.