Getting a tax refund is a great time to start planning for the year, but you may also feel the drive to use your refund as a way of treating yourself.
While it’s understandable that you’ll want to buy yourself something nice with all of this extra money, it’s also important to remember that a tax refund is a long-term investment. Over the years, the average taxpayer has received a refund of around $3,000. To help you plan for the future, here are some simple tips on how to spend your tax refund.
One of the most important steps in building wealth is to invest your tax refund. Doing so will allow you to grow and put money into a variety of different financial instruments. For instance, if you receive a tax refund of around $3,000, investing it will allow you to earn an average annual return of 6%.
It’s also important to note that investing your tax refund in each of the next 10 years will allow you to build up a substantial amount of wealth. After 20 years, you’ll have more than $60,000 invested.
Wipe Out Some Debt
Getting carried away by high-interest debt can negatively affect your bottom line. It can also increase your monthly expenses and put a strain on your credit.
One of the best ways to get rid of high-interest debt is to pay off your credit card bill. Doing so can save you thousands of dollars a year in interest.
If the refund doesn’t cover all of your credit card debt, consider using a balance transfer credit card to pay off the remaining balance. If your credit is not good enough, consider a debt consolidation loan.
If you have high-interest debt, start planning on how to pay it off. If your tax situation is the same next year, adjust your current withholding to allow you to use the money to pay down debt.
Build An Emergency Fund
An emergency fund is a type of savings that can be used in the event of a job loss, medical emergency, or sudden financial setback. It should have a minimum of three to six months worth of expenses.
Getting a tax refund can also help you build an emergency fund. One of the best ways to use this money is by opening a high-yield savings account. Some of the online banks that offer this type of account include Capital One, Marcus, and Ally.