They say it takes money to make money. If you're about to get a tax refund, here are seven ways to leverage that cash into more.
Last year, more than 110 million Americans received an average tax refund of $2,803, the IRS says.
But a January increase in payroll taxes means a smaller paycheck for most Americans going forward, and that fewer people will run out and buy a new TV or car with the windfall, according to the National Retail Federation. Nearly half of those expecting a refund plan to pay down debt, and another 40 percent will put it into savings.
Good thinking, but can you do more? In the video below, Money Talks News founder and CPA Stacy Johnson wraps up our Tax Hacks series with a few more smart uses for tax refunds. Check it out, then read on for more ideas…
As Stacy suggested, changing your tax withholding on your W-4 at work is one way to make sure you don’t waste a refund – you’ll get to keep more pay year-round instead of receiving a fat check from Uncle Sam once a year.
But if you’re not sure what to do with your refund this year, here are some ideas that will make you richer – either by protecting your bottom line (from fees, interest charges, and frivolous spending) or by offering memorable new experiences…
1. Pay down debt
Use your refund to reduce high-interest balances. Not only does this cut down the interest charges and overall amount you owe, it may also improve your credit score by lowering your credit utilization ratio. And a better score can mean easier access to credit at better rates – something that can make you richer.
Look at it this way: Paying down an 18-percent-interest credit card is like earning 18 percent, risk-free and tax-free. There aren’t many investments that offer returns like that.
2. Create an emergency fund
Living paycheck to paycheck often means there’s never enough to get ahead. Use your refund to build a financial cushion, ideally enough to cover at least three months of living expenses. Then bills always get paid on time, which saves late fees; you never need a cash advance, saving fees and high interest; and you can stock up on bargains at the grocery store. And the peace of mind? Priceless.
And if you’ve already got an emergency fund, set the money aside for something you know you’ll have to replace eventually, like your next car.
3. Save on insurance
Speaking of vehicles, many car insurance companies offer a discount if you pay the six- or 12-month premium in full. Use a chunk of your refund to do that, and put the rest in a savings account so you can raise your deductible – a simple way to save 10 to 20 percent on your premium.
4. Use it for something deductible
Earn a tax credit with energy efficiency improvements to your home, pump up a retirement plan, or donate to charity and your tax refund will be doing double duty, because you’ll be creating a deduction you can use next tax season.
5. Start a business
Use your refund as seed money for a side business, or classes in a skill you’ve always wanted to learn. You could launch a website, sell your own arts and crafts, or start a garden and sell your extra fruits and veggies at a farmers market. Boosting your skills might be good leverage for a raise.
6. Think big
If you’re going to blow the money, at least make it an event to remember – maybe take the family skydiving. Anything’s better than just frittering your refund away in forgettable ways. If you opt for a vacation, stretch it by saving, whether you want a traditional vacation for cheap or a getaway in the Italian countryside.
Like Stacy said in the video, if you’re going to spend the money, don’t make a purchase, make a memory.
You could start funding a 529 college savings plan, or open an individual retirement account for yourself. Earn 10 percent annually for 20 years and your $3,000 refund will blossom into $20,000. Make it a habit and invest $3,000 every year for 20 years, earn that same 10 percent, and you’ll end up with more than $200,000.
What are you planning to do with your tax refund this year? Tell us below or on our Facebook page!
And if you haven’t filed yet, make sure you get the biggest refund you can. Check out the links below for other stories from our tax hacks series.