Each year, more than 70 percent of U.S. taxpayers receive a tax refund, at an average of $3,031, according to the IRS. Getting a refund might seem like a free gift from the government, but remember—it’s your money. You might be tempted to treat this windfall like a mini-lottery win and go on a splurge, but there may be better ways to use this “extra” cash:
Pay off debt
Credit card and loan payments can strain your budget. Using your refund to pay down or pay off debt will lighten the load.
Start or strengthen an emergency fund
You can’t predict life’s interruptions, like a job loss, medical emergency or sudden repairs, but you can prepare financially. Create a safety net for yourself by starting or growing your emergency fund. Are you interested in a way to save without increasing your payments? Each time you pay off a bill, pay yourself the amount you would have put toward that bill by transferring the payment amount to your savings or money market account, and watch how quickly it grows.
Contribute to retirement savings
Looking forward to a comfortable retirement? Your refund may grow tax-free or tax-deferred if you put it into an IRA. Beginning in 2019, you can contribute up to $6,000 (or up to $7,000 if you’re 50 or older). Don’t have an IRA yet? It’s a great investment toward a secure retirement.
Save for college, tax free
Contributing your refund to a 529Plan plan is an investment in a child’s future…and it’s free from federal taxes. As of October 2018, there were no income or age limits, and annual contribution limits could be as high as $500,000, depending on your state.
Put money aside for a home
If you don’t own a home but plan to buy one someday, this is your opportunity to save toward that goal. Open a separate savings account and start putting aside money for a down payment.
Start a short-term savings account
Do you want to splurge on something special, but need to save a little more money to hit your goal? Consider a short-term savings account like Navy Federal’s SaveFirst Account. With the money safely tucked away in a savings account, you can avoid the temptation to spend it.
Although saving and investing money may not have the same immediate appeal as a big splurge, if you build a solid financial foundation now, you can afford to splurge more later.
Investing can help you reach those big life goals, like buying a home, starting a business or building a retirement fund faster. You can get started for surprisingly little money. There are even low-cost automated services available online that do the hard work for you. You can use their already diversified portfolios or mix it up with your own choices. So, even if you have no experience, you can get started and learn as you go.
This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.