Whoo hoo! Ready for a nice, fat refund check from Uncle Sam? Last February, the IRS reported that the average tax refund it had processed for the 2016 filing season was $3,053.
All too often, such extra money makes people splurge, even while they imagine they’re saving it. How do you make sure this year’s windfall makes your life better in the long term? Try these nine ways.
Idea No. 1: Pay down high-interest debt
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High interest rates can lead to the accumulation of devastating debt. Eventually you can end up with payments so large that it becomes difficult to do more than pay the minimum required each month.
That’s why one of the best uses for a windfall is to use it to pay down, or pay off, your debts with the highest interest rates.
Think of this way: Paying off a debt with a 15 percent interest rate is like earning 15 percent, risk-free and tax-free. That’s an investment virtually impossible to find these days.
When you’ve paid down your debt, don’t stop. If credit-card debt, payday loans or other high-rate debts have been a problem, use this moment to escape the cycle. Choose from trustworthy sources of free credit counseling, and get help.
Idea No. 2: Pay off small debts
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Paying off high-rate debt first generally makes the most financial sense, but it might not work for you. Some people get more motivation from demolishing smaller debts first. Then, as they see those debts fall by the wayside, they have more motivation to tackle the bigger debts.
We’ve discussed the potential value of such an approach in posts like “How to Pay Off $10,000 in Debt Without Breaking a Sweat.”
Remember, be careful not to run up new debt and dig yourself back into the same hole.
Idea No. 3: Fatten your emergency fund
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You are debt-free? Bravo! In that case, strengthening your financial safety net may be the next best use of a tax refund.
Opinions differ on how much to save for emergencies. Many experts advise keeping enough money to cover your expenses for six months; some say longer.
But maybe a better question to ask is the following: If you lost your job, how long could you expect to be unemployed? The length of time people are unemployed typically depends on what the economy is like when they lose their jobs and, of course, the type of job they have.
Your savings should be greater if you’re older because it often takes older workers longer to find work. AARP’s 2014 analysis of data from the U.S. Bureau of Labor Statistics on the average length of unemployment for workers found the following:
- Age 54 and younger: 34.7 weeks to find a job (almost nine months).
- Age 55 and older: 45.6 weeks (nearly a year).
Idea No. 4: Save for retirement
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Retirement savers are a lot like professional football players, says Money Talks News writer Maryalene LaPonsie. They keep their eye on the clock, and they expect to make progress a few yards at a time.
Read her six tips from the gridiron for retirement savers.
Idea No. 5: Save for college
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Whether it’s for your education or your kids’, apply your refund check to a college savings plan or 529 plan that offers tax benefits in addition to saving money for college.
Idea No. 6: Invest in your career
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Leverage your refund to grow earnings. Here are five ways to do it:
- Get more education. Sign up for a workshop or course, or attend a conference or webinar. Upgrade your skills, or try out a new field.
- Subscribe. Sign up for professional publications, including newspapers such as the Wall Street Journal and New York Times. Or, pay for cable TV or satellite radio channels that help your work acumen. Buy software you need to get ahead. Buy a premium LinkedIn subscription to network, or to find work.
- Invest in the right clothes. Get a tasteful, understated but impressive outfit for work or job interviews. Make sure it’s one that makes you feel like a million bucks. Include good shoes.
- Buy the equipment you need. Get the new laptop, tool or piece of electronic equipment you need to move ahead in your field.
- Get therapy. Career advancement isn’t only about the right tools, skills and credentials. A chip on your shoulder, depression, anxiety, a fear of success or problems at home can prevent you from reaching your earning potential.
Idea No. 7: Hire a career coach
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Career coaching can help you discover strengths, identify where you could use help, set goals and strategize. There are many ways coaching can help further your career.
The PBS website Next Avenue says:
Some career coaches are really job coaches, working exclusively on ways to make you a better job candidate.
Many coaches, however, work with clients both on technical matters (like improving your resume and interviewing skills) as well as personal ones (like figuring out what makes you happy).
Idea No. 8: Contribute to charity
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Do good for others while helping yourself earn a healthy tax deduction by supporting a charitable cause. Make sure to get a receipt for your contribution, and be sure the organization you support is a legitimate 501(c)(3) charity, defined here by the IRS.
Idea No. 9: Start a business
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Make your refund your grubstake. Start the business you’ve been dreaming of, whether consulting, opening a coffee cart or retail outlet, selling your crafts, or patenting an invention.
What is your plan for your tax refund? Share your thoughts in comments below or on our Facebook page.