finance

Five Ways to Make Your Tax Refund Work For You

Over the past few weeks I’ve received a ton of questions on tax refunds and what are some ways to utilize that money. I’m going to discuss in this article, my top five ways you can use your refund money. But before we jump into that, let’s discuss a few things about tax refunds overall.

According to the IRS, nearly 3 out of 4 Americans receive a tax refund each year. When you think about how many people are currently in the United States, that’s a lot of people. Roughly 111 million people will get a refund this year, so it’s important to focus on ways to utilize that money to benefit you most. 

The average refund is about $2900, which the IRS has noted in numerous data reports. If you look at the average income, which is about $56,000 a year, someone earning that salary would have a gross paycheck of about $1,000 a week. So remember, gross is the amount before taxes are deducted, so the take-home pay could be about $700-$800 considering taxes and other deductions.

With that being said, a lump sum $2900 tax refund is a lot of money. It’s important to remember, a tax refund isn’t free money or a gift from the government. A refund is money the government actually owes you. When you overpay on your taxes, the government ends up being lent money free of tax. 

Some of my clients have asked if it is normal to get larger refunds. If you get a large tax refund each year, you may want to sit with a tax consultant and adjust your W 4 withholdings. By adjusting your withholdings, you get to keep more of your paycheck each month. So if you really think about it, is more money in your pocket throughout the year better than having to wait for one lump sum that you need to go through a process to get? I think so… but that’s just me!

Now before I dig into my 5 ways to utilize your refund this year, beware of the TAX ADVANCE options a lot of tax prep companies are now offering. Some of the big tax businesses out there don’t openly disclose how much you really pay for that “advance” of your refund. In the research I have conducted on some of these tax advance options, your interest rate ends up being almost 35%, which is basically a loan that you take on your refund. I don’t personally suggest going this route because you will end up paying more for the money you are owed anyway.

Here’s my 5 suggested ways to use your tax refund this year:

1. Build Up Your Savings

Four in ten adults cannot afford a $400 unexpected expense today. An unexpected expense can be getting your car fixed due to an accident, your tire going flat, needing a new water heater out of nowhere, you get where I am going with this… This is why it’s crucial to have at least $1000 of savings stashed away for emergencies. Once that is established, you should make a goal to save three to six months of your average expenses, just in case anything were to ever happen. If you can afford to put away most or all of your refund, that may be a great idea depending on my next option.

2. Paying down your debt

If you can at least pay off some of your smaller debts, such as some credit card balances or personal loans, you will be saving a ton on interest and also, adding more money to your pocket each month. Paying down debt can help you get a lot of your monthly income back so you can save and distribute it to other important things. 

If you can’t completely pay debts off, consider making some large PRINCIPAL payments on your loans to knock the balances off quicker. Remember, if you pay down more of your debt now, you can really use your money for your savings goals and other things you have been looking to achieve. More money in your pocket moving forward? That’s a win to me!

3. Adding to your retirement accounts

No matter how old you are, retirement should be something that has crossed your mind at one point, even if it wasn’t recently. If you don’t have a retirement account, I really suggest you visit your local bank or credit union to see what they offer. Depending on your age and your goals, they may discuss a Roth IRA and a Traditional IRA.. Some retirement accounts have tax advantages which you may be able to utilize next year for your taxes. Being one step ahead in creating a financially secure future for yourself (and family) is one of the best things you could do.

4. Invest in yourself, whether it’s starting a small business OR enhancing your education

Have you been dreaming of being your own boss? Do you have a great business idea and just needed some capital to start it? This may be your time to shine. Consider using your tax refund to invest in you and your dreams. Having some extra money, like your refund, can be a great opportunity for you to jumpstart what you have been yearning to do.

If you have been looking to go back to school or possibly take some courses in a skill you would like to learn, this may be a great time to look into that as well. Maybe you have been wanting to learn how to edit videos or learn how to do coding, so using your money to fund your aspirations is a great idea.

5. Save to buy a home

Are you tired of paying rent each month? Have you been looking to finally own a home or condo? Tax season may be a perfect time for you to save your refund and put it towards a home. That doesn’t mean you need to buy the home now- open a separate savings and let your down payment earn some interest while you wait to find your forever home. Buying a home can be its own article in itself, but saving for your down payment can save you a lot of money, not just with interest on your mortgage, but also when it comes to PMI on certain mortgages. PMI is additional insurance added to your loan when you are unable to put a full 20% down payment towards the purchase your home

So those are 5 ways I recommend utilizing your tax refund this year. I hope you enjoyed this article and learned of some new options that are at your disposal. Remember, your tax refund was already money that was owed to you, so treat it like you worked hard for it, because you did! 

Make sure to tune in to my weekly Two Sense Money podcast available on Spotify, Apple Podcasts, and Anchor just to name a few! 

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