The Best Ways to Spend Your Upcoming Tax Refund

 
For the average American, tax season typically means a big payday is on its way. According to Forbes Magazine, the average tax refund last year was $2,700—a huge amount for the average American workers. In fact, the average tax refund check is more than the monthly take-home income of roughly two-thirds of the country. Such a huge sum of money can be very tempting when you have a wish list of big-ticket items like cars, vacations, new furniture and other purchases. But if you’re looking to make a smart financial decision with those funds, it’s worth your time to consider the best possible uses of this money.
By eschewing indulgence for practicality, you can use your annual tax refund to save more money in the long run, and possibly even make a little profit. Here are four smart moves to make with your upcoming refund.
Pay Off High-Interest Debt
If you’re carrying credit card debt, high-interest loans or other debt that accrues interest at a high rate, using your tax refund to wipe out these outstanding balances is a smart move that can save you huge sums of money. According to Forbes, the average American household is strapped with more than $15,000 in debt, and the annual interest rate on that debt is a steep 15 percent. If you’re facing debt that carries double-digit interest rates, put as much of your tax return as you can. On such high interest rates, the payment of even $2,000 from your tax return can save you thousands of dollars in interest over the life of the debt.
Invest in a Tax-Friendly Fund
Retirement funds typically offer great tax advantages, and using a tax return to fund these accounts can offer a double-whammy in terms of your accrued tax benefits. As Kiplinger notes, tax refunds deposited into a traditional IRA are tax-deductible, meaning you’ll pay less on taxes in the short run and will only have to pay tax on the withdrawals you make from the fund’s revenues. Or you can save even more money in the long run by investing into a Roth IRA, which taxes the fund’s contributions but allows your fund disbursements to be withdrawn tax-free.
Use The Lump Sum as a Downpayment
For many people receiving a tax return this year, the funds will represent a huge amount compared to what they earn and save in a given month. For some, the refund may equal an amount of savings that they struggle to acquire on their own, or without a long period of saving. While leasing services like DriveTime are a great in-between solution for people who need a vehicle but lack the cash for a downpayment, a tax refund could present the opportunity to invest in a used vehicle that’s fully yours. Cars can be a trap if your eyes are bigger than your wallet, but if you make smart decisions the resulting purchase could be a great financial move.
Purchase a Home Energy Audit
Want to use your tax refund to get more money in the future? Lower your monthly utility bills by getting a home energy audit. As BankRate.com notes, this quick intake of your home’s energy consumption can help you identify insulation leaks and other key energy consumption points that are costing you money every month. This audit typically costs a few hundred dollars or less, but many homes can make that back in the course of their annual savings.