3 Smart Ways to Spend Your Tax Return

Getting your tax return is always a wonderful occasion. In 2019, the average taxpayer received a refund of around $3,000 from the government. That’s a big check! So how should you spend it? While it may be tempting to go on a shopping spree, buy a flatscreen TV, or make other impulse purchases, those probably aren’t the most sensible choices.

Instead, you might consider using your tax return to improve your financial well-being and set yourself up to achieve your long-term financial goals. With that being said, here are three smart ways to spend your tax return.

#1: Pay Off Debt

When you get some extra cash, paying off existing debt is always a good idea. Debt can be a huge inconvenience and a source of seemingly endless stress. It can act as an obstacle that stands between you and your financial goals. So, paying it off when you have the means to do so is, in most cases, a great financial move.

Consider the fact that the average credit card has an interest rate of nearly 17%. Even if you’ve only accrued a small amount of credit card debt, that amount can snowball month after month. If you don’t pay attention to the amount you owe and steadily pay it off, it can eventually reach an unmanageable sum, trapping you in a web of debt that could take years to escape from.

So do the responsible thing with your tax return and pay off existing debts. Doing so can lower your stress levels, increase the level of financial freedom you enjoy, and possibly even boost your credit score.

#2: Invest in Stocks

Investing in the stock market can be a great way to increase your financial well-being and learn a thing or two in the process. While there is some risk involved, the stock market typically provides a much better return on investment than buying bonds or sticking your cash in a savings account. For instance, compared to savings accounts, which have an average interest rate of 0.05%, the S&P 500 has an average annual return of 13.6%!

So how do you get started with investing? First, you’ll have to do plenty of research. It’s always important to look into the companies you’re considering investing in and assess their likelihood for growth. You’ll also have to define your own financial goals and risk tolerance, and build an investment portfolio based on those factors.

If you have a low risk tolerance and want to invest conservatively, then you’ll likely have to play the long game and trust that your investment will grow over a number of years. If you have a high risk tolerance, on the other hand, then you might be more interested in quickly buying and selling different stocks, which allows you to earn (and lose) money without having to wait years for an investment to mature. If you do end up making some money on your investment, then you’ll want to look into relevant tax laws, too — after all, you don’t want to end up getting audited or receiving a notice of deficiency.

#3: Start an Emergency Fund

Everyone needs an emergency fund. Unfortunately, most people either can’t afford to start one or just don’t make an effort to. This is illustrated by the fact that about 40% of Americans would struggle to come up with $400 to pay an unexpected bill.

That’s a scary statistic when you think about all of the different unexpected costs that can arise from time to time. Car troubles, home repairs, hospital bills, and more can all pop up when you least expect them. Or, consider what you would do if you lost your job. As a result of the current COVID-19 pandemic, millions of Americans are unemployed and struggling to keep up with their bills. Prepare for situations like these by setting up a financial safety net for yourself.

Ideally, you should put enough money in your emergency fund to support you for three to six months — however, if your budget is tight, this might be asking a lot. That’s why putting money from your tax refund into an emergency fund is such a smart move. It’s an opportunity to add a significant amount of money to an account that you’d usually only be able to add small sums to.

While getting your tax return may be exciting, it can be tempting to use it on impulse purchases and unnecessary luxury items. But you should keep in mind that a tax return isn’t a free handout, it’s your money that you worked hard for. So be smart, come up with a plan, and consider using that money to improve your financial well-being.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes