As grueling as taxes are, there can be a silver lining: the refund. Over the past few years, the average federal tax refund has been about $3,000. As tempting as it might be to spend a refund freely, though, take a moment to consider these five alternatives for a better long-term result.
1. Reduce debt
Splurging on a trip might sound good now, but cutting your debts can have a long-term impact that’s empowering. Start by paying down any high-interest credit cards. Once you’re free of card balances, you can stop worrying about paying them off and focus on the future.
2. Build emergency savings
Living life without money put away for the unexpected is risky, and the sooner you can remedy this, the better. Check your latest account statements to total up your monthly living expenses and set aside part of your refund with a goal of accumulating enough money to cover your expenses for three to six months. Whether a medical emergency strikes or you lose your job, it’s good to be prepared.
3. Contribute to retirement
You’ll benefit in the long run from putting funds into a retirement fund or a 401(k) plan, if your work offers one. The earlier you contribute, the more your earnings will grow over time. Financial institutions, including Canopy Credit Union, offer bump-rate savings certificates that let you change the rate of return to increase it, under certain conditions.
4. Save for education
If you have kids at home, consider transferring part of the refund into a 529 college plan, an investment account in which any earnings you gain aren’t federally taxed. Plus, having a designated account can help you organize your finances. Of the two kinds offered — prepaid tuition and savings plans — the first limits you mostly to tuition costs; the second lets you use funds for tuition, room and board, mandatory fees and supplies.
5. Improve your home
Repairing or replacing things like drafty windows or worn-out garage doors can be a good investment, especially if you plan to sell your home someday. Be aware that some fixes have better returns, though. A replacement steel front door, for example, can have a better effect on your home’s resale value than remodeling the kitchen, according to Remodeling magazine. So do your research.
Although splurging may be nice, reinvesting your tax refund this year can help you prepare for future events. It might also help your financial health in the long term.
Spencer Tierney, NerdWallet
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