Cha-ching! Getting a tax refund may feel like a welcome surprise — and like a good time to treat yourself to a fun purchase. But that money wasn’t free: It was your hard-earned cash, to begin with. You merely gave an interest-free loan to the government and are now getting it back.
The average tax refund in 2020 as reported by the IRS was $2,748, and often is a crucial factor in many Americans’ financial well-being.
Bearing these things in mind, here are some suggestions on what to do with it.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Cover the basics
Take some time to distinguish your essential spending from your desired spending. Essential spending would include things like housing, food, medical and utility bills. These are all things that you should focus on covering before you spend your tax refund on desired or non-essential purchases.
2. Get that emergency fund in place
There’s nothing like a global pandemic to help remind you that it’s wise to have some cash saved for any surprise expenses that pop up. Target between three to six months’ worth of expenses in a liquid account for easy access. Be sure to keep these savings in an account that’s separate from where you hold funds for essential spending. Having emergency money set aside will help you bridge gaps, especially if you are furloughed or laid off.
3. Pay off that high-interest debt
The typical American household now carries an average debt of $138,722, with part of that figure being from credit cards — one of the costliest kinds of debt. Have an aggressive plan to get rid of your debt; consider paying the balances with the highest interest rates first. All other things being equal, this will save you money in interest payments over time. If you were one of the many millions who have been financially impacted by the pandemic, many credit card companies are willing to work with you on your repayment terms … if you ask.
4. Invest in a solid retirement strategy
The earlier and more often you start saving and investing, the faster you can get your investment gains to start compounding and growing. If you are in your 20s, start now if you can. You have time on your side and won’t have to stash away nearly as much as you would if you started in your 30s or 40s. Take some of your tax windfall to accelerate your savings, but don’t stop there. Automate your savings when you can, so it becomes a habit going forward you don’t even have to think twice about.
At first, it may feel like you’re running in place, but be patient. After awhile, you’ll see that account balance grow to a more impactful size — and you’ll realize you won’t even miss the cash.
5. Invest in yourself
Use some of your tax refund to take that online class or purchase that book. This may be the perfect time to brush up on some soft or technical skills, especially if you are searching for a new job, making a career switch, or restructuring your business as a result of the pandemic. After all, intellectual capital is much like financial capital: It compounds over time. There’s no greater return on investment than something that leads to your own personal growth and a better future.
Finally, be patient while you wait for that IRS check
If you are one of the many who are entitled to a refund and still waiting, don’t be surprised if it takes longer than usual. When much of the world shut down due to coronavirus, that included the IRS — which also had to manage the many stimulus payments that went out, even further backlogging processing centers and delaying tax refund payments. While you wait, you can track the process of your payment.
Although the delay can be frustrating, it will give you some time to plan out your spending or savings thoughtfully. Now is the time to adjust any tax withholdings from your paychecks or retirement account distributions and consult your tax professional with questions. Your future self will thank you.
-
Americans Are Retiring Later: Will This Trend Last?Given a host of pressures to keep working, Americans are retiring later in life. Will regulatory and economic forces encourage you to work longer?
-
Trump’s Tax Cut Risks Your SNAP, Medicaid BenefitsTax Cuts The GOP budget blueprint could slash lifesaving programs for millions of U.S. households.
-
SRI Redefined: Going Beyond Socially Responsible InvestingNow that climate change has progressed to a changed climate, sustainable investing needs to evolve to address new demands of resilience and innovation.
-
Here's When a Lack of Credit Card Debt Can Cause You ProblemsUsually, getting a new credit card can be difficult if you have too much card debt, but this bank customer ran into an issue because he had no debt at all.
-
Going to College? How to Navigate the Financial PlanningCollege decisions this year seem even more complex than usual, including determining whether a school is a 'financial fit.' Here's how to find your way.
-
Financial Steps After a Loved One's Alzheimer's DiagnosisIt's important to move fast on legal safeguards, estate planning and more while your loved one still has the capacity to make decisions.
-
How Soon Can You Walk Away After Selling Your Business?You may earn more money from the sale of your business if you stay to help with the transition to new management. The question is, do you need to?
-
Two Don'ts and Four Dos During Trump's Trade WarThe financial rules have changed now that tariffs have disrupted the markets and created economic uncertainty. What can you do? (And what shouldn't you do?)
-
I'm Single, With No Kids: Why Do I Need an Estate Plan?Unless you have a plan in place, guess who might be making all the decisions about your prized possessions, or even your health care: a court.
-
Most Investors Aren't as Diversified as They Think: Are You?You could be facing a surprisingly dangerous amount of concentration risk without realizing it. Fixing that problem starts with knowing exactly what you own.
