Maybe after preparing your federal and state income tax returns, you discovered you’ve overpaid and are getting a tax refund. According to IRS data, nearly 80% of taxpayers get a tax refund, with the average refund totaling about $2,800. That’s certainly better news than finding out you owe more!
If you are the lucky recipient of a refund, what do you plan to do with it?
Before you rush to spend that “found” money, consider how those funds might be put to more strategic use and improve your financial situation:
- Do you have more debt than you’d like to have? Paying down a chunk of that debt with your tax refund might help you build momentum to get it paid off.
- Do you have an emergency fund for unexpected expenses? If not, use your tax refund to build that fund now, so you can prepare for unanticipated auto repairs, health expenses or a job loss. (And if you’re out of debt and have already started an emergency fund, consider adding to it to give yourself some extra breathing room).
- If your debt is under control and your emergency fund is in good shape, consider opportunities for investing your refund, perhaps through a traditional or Roth Individual Retirement Account (IRA), or starting a 529 plan to save for your kids’ college. Talk to a financial professional to find out the best strategy for your and your family’s needs. (And remember: it’s never too early to start saving for retirement!)
- If you received a substantial refund, you may be withholding too much from your paycheck, so you might consider adjusting the amount you are withholding from your paycheck. Then you could take the extra money in each pay period and direct it toward increasing your contribution to your 401(k)—which will lead to faster accumulation of your retirement funds.
April was National Financial Capability Month, and as most Americans focused on their tax filings, now is a good time to think about how you can improve your financial standing—and carefully consider how you might make better use of your tax refund is a great place to start.
For more on developing financial literacy skills, check out our past Project Invested posts on America Saves Week, Wells Fargo’s “Path to Good Credit” initiative and the “Better Money Habits” initiativefrom Bank of America/Khan Academy.
*Project Invested does not give tax, legal or investment advice and readers should consult a tax adviser if they have questions.