Ways to Invest Your Tax Refund

Financial advisors recommend that American taxpayers attempt to adjust their tax withholding to see that they neither have to pay the IRS nor get a refund. This happy medium is difficult to achieve, and the average tax refund is a little more than $3,100. This is admittedly a nice windfall for most folks. The question then arises of how this refund should be used. Here are some options that will help improve the average American’s long-term financial standing.

Pay Off High-Interest Debt

The average household in the US now has about $16,000 in credit card debt. Even if the interest rate were only 10 percent, this would require about $1,600 in interest payments each year before the first dollar gets applied to the principle amount of the debt. A nice tax refund could make a nice dent in the amount of credit card debt that a family might hold. Paying off this debt would cut the amount of income going toward interest, and it would also help monthly cash flow because there would be at least one less bill going out every month.

Set Up An Emergency Fund

If you have no high-interest debt and you’re looking to avoid getting into debt, an emergency fund is a great investment. Most personal finance experts recommend holding between three and six months of household expenses in an emergency fund. These funds serve as a hedge against a bout of unemployment. They can also help families avoid going into credit card debt when an actual emergency pops up, and emergencies do pop up.

Invest In An Index Fund

Setting up an IRA or a taxable investment account can provide a good opportunity to utilize a tax refund so that it will pay dividends, in a very literal sense, well into the future. There are a number of major discount brokerages that allow people to set up a new account in just a few minutes. You’ll have to provide your personal information and then link a bank account. That’s usually about all that’s necessary. You can then deposit your tax refund and purchase any investment that the brokerage offers. Warren Buffett recommends index funds because they minimize management fees and follow the entire market, or at least a subsection of it. Index funds also tend to outperform managed funds over time.

Up Your 401(k) Contributions

An average tax refund would provide a little more than $250 in monthly income if spread across the course of a year. This would allow you to put an additional $250 toward your work-based retirement account while also providing the benefit of cutting your taxable income by more than $3,000 when it comes time to pay taxes next year.

Invest In Yourself

One investment that many people forget to make is self-improvement. Your tax refund could pay for that cultural vacation to Miami or Cancun that you’ve always dreamed of taking. It could also pay for a few classes that could lead to an advanced degree or a specialized industry certification. These investments could actually provide much more than the monetary benefit that a tax refund would provide.

Getting a tax refund can be exciting. Refunds can provide a nice windfall of cash. There is frequently the temptation to spend the excess money immediately. However, it’s possible to invest a refund that can pay dividends for years, or even decades, to come.