On April 7, the IRS estimated the average 2022 tax refund at $2,878. Down from $3,175 in 2021. Many filers are thinking about this tax season, which ends today, April 18.
How To Spend Tax Refund Money?
Obviously, an IRS refund is merely a reimbursement for tax overpayments made throughout the year with no interest attached. However, for many individuals, refunds come as a pleasant surprise, making them feel like bonus cash. To help you get started, here are some alternatives to spending your tax refund immediately.
Supplement Your Urgent Tax Refund
Financial advisors typically advise setting aside at least three to six months’ worth of expenses in the event of an emergency, such as job loss or an unexpected medical bill. Sadly, 53% of Americans do not have any emergency savings.
Even though your refund may not cover the recommended amount for an emergency fund, any amount helps. According to a 2022 LendingClub survey, the average cost of an unexpected expense is $1,400. If possible, try to save at least $1,400.
Pay Off High-Interest Debt
Credit with interest rates in the double digits, such as credit cards and payday loans, is typically considered high-interest debt. The interest rate on your credit card balance is currently 20,21% per year.
This is due to the fact that the longer it takes to repay debt, the more interest you will pay. You will have extra cash if you can avoid carrying a balance.
Contribute To Your Retirement Savings
Putting extra money into retirement accounts such as a 401(k) or individual retirement account (IRA) may not seem particularly exciting, but it will pay off when you reach retirement age. Due to compound interest, the value of the funds will increase exponentially with time.
If you are behind on commonly recommended retirement savings goals based on your age, it is a good idea to begin saving for retirement.
Read more: Social Security 2023: When will you receive your April payment?
Save For Short-Term Goals
Another option is to save your refund for large expenses you anticipate incurring later this year, such as holiday gift shopping or a long-planned vacation.
Consider opening high-yield savings account to maximize the amount of interest you earn on your savings. Smaller online banks typically offer the best rates for these accounts, which currently exceed 5%.
The interest rates on certificates of deposit and short-term bonds are comparable, but the money in these investments is locked up for months or years unless you pay penalties for early withdrawals.
With high-yield savings accounts, money can typically be withdrawn immediately. Because of this, they are likely the safest place to store your emergency fund, as you never know when you might need the extra money.
Read more: Tax refunds: Who is eligible for the IRS $900 payment and how to claim it?