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Wise Ways to Use Your Tax Refund

May 20, 2022

Wise Ways to Use Your Tax Refund

Another Tax Day has come and gone.  If you were fortunate this past tax season, you received a tax refund from the IRS.  According to Cnet, Uncle Sam puts about $3,000 back in the average American’s wallet when tax time ends.1 As tempting as it may be to spend your return all at once on the luxury of choice, you might think about balancing your purchasing pleasure with practicality.  Here are some tips for what to do with your tax refund:

  1. Ramp up your rainy-day fund: If you don’t have an emergency fund, now is an excellent time to start one. Consider placing part of your refund in a high-interest savings account. If you’ve already begun saving for a rainy day, try to increase that savings account to cover at least six months’ worth of expenses, so you have a cushion for job loss, repairs or other emergencies.
  2. Put a dent in your debt: Nothing burns a hole in your pocket like high-interest debt. Think about using a portion of your tax refund to pay off credit-card debt or other high-interest loans partially or completely.
  3. Capitalize on a 529 plan for college expenses: Consider starting a 529 plan, which offers a tax-advantaged way to save for a child or grandchild’s college education. It won’t reduce your income for current federal taxes, but when the funds are withdrawn and used for qualified educational expenses in the future, the money comes out tax-free, including the earnings. If you live in a state with a state income tax, you might be able to reduce your current-year taxes if you participate in a plan sponsored by your own state.
  4. Sow the seeds of your own growth: You are your most valuable resource. Enroll in a continuing education, trade association or college course to improve your job-related skills. The money you spend up-front on your own development may repay you exponentially by increasing your potential earning power.
  5. Remember, it is better to give than to receive: Donate a percentage of your refund to your favorite charity.
  6. Reward yourself: Use 10 to 25 percent of your refund to splurge on that discretionary item, day trip or king-sized dinner at a nice restaurant. Or you can place that money in your vacation savings for a vacation some time down the line.

With a little strategizing, you can use your refund to satisfy future needs and current wants at the same time. If you liked this article, you might also like, “Why You Need and  Emergency Fund and How to Build One.”

  1. Cnet.com, “Here are Six Smart Ways to Use Your Tax Refund,” by Courtney Johnson, May 4, 2022.

This article is for informational purposes only.  MMBB does not guarantee the results of using this information.

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