Not to be a downer, but if you get a refund come tax time, it means one thing: you had too much money withheld from your paycheck throughout the year and you gave the government an interest-free loan.
Not that that’s a bad thing. The debate will surely rage on about whether it’s a good idea to set yourself up for a refund, with many experts loudly proclaiming it a bad idea. When the tax laws last changed, in 2017 for the 2018 tax year, a lot of people weren’t prepared for the withholding changes and were caught short.
Regardless, the average taxpayer still received a refund of roughly $3,000 each of the last few years, and if you’re one of the many people who look forward to that windfall every April, here are some ideas to be fiscally smart when your money comes back around to you:
In short? It’s NOT the time to buy a newer and bigger television, it’s time to put that money to work…
- Pay off or pay down high-interest credit cards, or, if the refund won’t pay them down completely, consider rolling the balance over onto cards with lower interest rates. (Note: consider the interest you pay during the course of a year and whether it’s better to have less money withheld from your paycheck so you can pay that debt off sooner.)
- Add funds to your emergency account. Or set one up if you don’t have it already.
- Invest it. A taxpayer who received a $3,000 refund in 2019, invested it and earned a 6% average annualized return would have more than $5,000 in that investment today. If they did the same for each of the past 10 years, they’d have more than $47,000 today.
- Put it toward retirement. Whether that’s your 401(k) or some version of an IRA, you can use the refund in a tax-free investment for your golden years.
- Put it toward an education fund or a 529 plan, each of which offers tax benefits as well.
- Buy whole or universal life insurance policy and “overfund” it.
- Donate to your favorite charity – it’s a deduction!
There’s an old adage about “found” money and how it tends to disappear no matter what you do, and tax refunds and bad money choices only serve to prove it true. On the other hand, with just a bit of forethought, you can take that refund and really use it to create something far greater with only a bit of imagination.
Make it count this year!