If you received a refund on your tax returns this year, you were probably excited by the nice little boost you got to your cash flow. Here are a few smart ideas to use your tax refund for that will amplify the boost to your cash flow. (We'll leave the discussion of why a tax refund is actually a bad thing for another post)
In 2016 the IRS is estimating that the average tax refund will be around $3,000. Here are my top things you could do with that money and how they'll put even more money in your pocket.
1 - Kill some Credit Card Debt
Benefit: $50 in your pocket every month
Dumping all $3,000 into paying down your credit card debt probably isn't the most exciting thing you could do, but it will put $50 back in your pocket every month on an ongoing basis. In addition to increasing your net worth by paying off debt, you'll also stop sending money (interest) to your credit card company. Assuming you have a typical 20% APR, that $3,000 payment to your credit cards translates to $600 per year in saved interest. Before rejecting paying off your credit cards because you are thinking about all the things you could do with the refund, think about all the things you could do with an extra $50 a month for the next 20 years.
2 - Build the Emergency Fund
Benefit: Less stress (what's Prozac going for these days?)
If you don't have at least three months' expenses in an emergency fund, your refund can put a big dent in that goal. Although an emergency fund isn't going to pay you back any monetary dividends, there is a lot of benefit to having a nice pool of money sitting in a savings account. An emergency fund takes a lot of the edge off of life, simply because you have the ability to write a check if something bad happens. Nothing solves a problem quite like a stack of cash.
3 - Give it to 'Old You'
Benefit: $13,000+ in your pocket
Whether you already have a retirement account or you need to start one, dumping that $3,000 into an IRA will help you turn that $3,000 into a massive pile of money. Assuming you invest for moderate risk, you can reasonably expect an average return of 8% per year. Over 20 years, that turns three grand into nearly $14,000. Take on more risk and you could see a 10% average return, netting you $20,000. Plus, if you have a traditional IRA, you'll get the added benefit of having a bigger tax deduction (and refund) next year!
4 - Lower Your Insurance Premiums
Benefit: Hundreds or thousands of dollars a year
Assuming you already have a fully funded emergency fund, you might want to consider putting the refund into a new savings account to pay for a car accident. If you take that $3,000 and put it into an account to pay for an accident, you can safely raise your insurance deductible to $3,000. Even if you hit someone, you have the deductible sitting in the savings account. Your car insurance premiums are priced largely based on your deductible. Contact your insurance company and you will likely be amazed at how much you can save on car insurance by raising your deductible and having a separate car accident fund.
5 - Give it to Your Mini-Me
Benefit: Thousands of dollars
If you have children, funding a child's college account is a great way to reduce your costs by allowing the money to grow dramatically. Using the same example as retirement, you could pay for over $13,000 or more of college with that single refund. Look into Coverdell or a 529 plans to get additional tax benefits from this money.
6 - Gamble and Expand Your Risk Tolerance
Benefit: Varies, do you feel lucky?
If you want to have a little fun with the refund, I see no problem with doing something a little risky with it. If there's a company/mutual fund that you've been considering buying, but you just don't know if it's too risky, why not consider using your refund to make that bet? Investing the refund money into a stock or mutual fund that is a little too risky for your normal investing can pay off dividends and help you to stretch your risk comfort zone a little. Just be sure to do your research.
7 - Do Something Fun
Benefit: Fun.
Not everything has to be about saving money, even though this one is still about saving money. If there is something you've been wanting to do, like take a vacation, add a deck onto your house, or buy a new car; throwing your refund into a new savings account you create for that purpose could go a long way toward making that wish a reality and will avoid 'future you' going into debt to finance it. Even if the refund can't pay for all of it, the $3,000 jump-start might be just what you need to keep your savings motivation up.
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