The average annual income tax refund is about $3,000. Smart taxpayers understand that this money is not just a windfall. Rather, it is the government returning your own money to you, when it becomes clear that you do not owe it to the government.
The good news about a tax refund is that receiving this lump sum gives you a great opportunity to make a difference in your financial future. Here are 10 ways to use a tax refund to brighten your money picture:
1. Pay down credit card and other high-interest debts (including payday loans).
About 20 percent of all credit cards are “maxed out” by their owners. Whether you are in that boat or just owe more than you should, applying your refund to your balance is a good move. As a bonus, you will improve your credit score, which is affected by the amount owed relative to available credit balances.
2. Build a cushion.
An emergency fund should include six to nine months’ living expenses (not necessarily your salary amount, but the amount of money you would need for absolutely essential expenses). The tax refund can go into this fund, and be able to provide a significant cushion so you do not have to resort to credit cards or payday loans to cover unexpected expenses should an emergency arise. Keep emergency fund savings in a money market fund or rolling CDs so that the money earns interest and cannot easily be spent, but you can access it in an emergency.
3. Get educated.
Put the money toward a college savings plan for your child, or strengthen your own financial future by continuing your education. A $3,000 refund could pay for a good portion of an associate’s degree, for instance. In turn, higher education can repay its cost: On average, associate’s degree holders earn 23 percent higher salaries than high school graduates; holders of bachelor’s degrees earn even more.
4. Refinance your mortgage.
If you are still stuck with a high-interest mortgage, that $3,000 refund can cover all or most of the costs of refinancing if your credit is good enough to do so. If you are able to refinance to a lower rate, and it makes sense for your situation, you could save thousands more in interest charges over the life of the mortgage.