Top 5 ways to “spend” your tax return

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How did you survive tax season this year? Hopefully our tips on how to DIY your taxes helped you make it through tax year 2016 and find a few deductions along the way!

Now comes the fun part: receiving your refund! For many people, it’s often no small amount – according to the IRS, the average refund was more than $3,100 for the 2015 tax year. And for homeowners able to take advantage of the key mortgage interest deduction, refunds can balloon to several times that amount.

As with most money matters, your financial situation and goals determine how you should best spend your refund. While it’s a good idea for everyone to save at least some of their refund, you can still reward yourself while building a stronger financial profile. By doing that, you could set yourself up to enjoy a bigger portion of your refunds in years to come.

As for spending on fun, we’ll leave that up to you. But here are some suggestions to consider for using your refund to help you quickly shore up your finances.

  • Tackle your high interest debt. Reducing your debt is one of the fastest ways to get financially stronger, and a sudden windfall from your tax return is one of the fastest ways to reduce your debt. Think about it: If you can pay off a credit card charging you an interest rate of 20 percent or higher, that’s the equivalent of earning the same amount as an investment. If your refund doesn’t cover your entire outstanding balance, consider transferring your remaining debt to a card with a lower interest rate. In addition, if you expect a similarly sized refund next year, adjust your withholding now to get that money throughout the year to pay off debt and save on interest charges.

  • Build an emergency fund. A recent January 2017 survey by bankrate shows that nearly two-thirds of Americans would go into debt if they faced a $500 emergency expense. A key part of financial stability is making yourself less vulnerable to the inevitable expense shocks like this that can otherwise drain your savings or put you into deeper debt. Many financial experts recommend saving at least three months of your living expenses. So if you’re getting a refund, make sure you save some of it. And also make sure you have easy access to the funds by keeping them in a money-market account or savings account that earns some interest. Read on for more tips on how to create an emergency savings fund.

  • Save for retirement. If you’ve fallen behind saving for retirement, or if you haven’t started yet, this is a great opportunity to catch up or get ahead. While you may not be ready to call it quits at work anytime soon, putting aside your refund every year will help you take advantage of compound interest. Consider that if you saved an average tax refund of $3,100 every year for 20 years, you’d have nearly $125,000 saved (assuming that money earned 6 percent a year). For 2017, you can contribute up to $5,500 to a Roth IRA ($6,500 if you’re 50 or older). However, if your employer provides access to a retirement savings plan like a 401(k), don’t forget to first contribute enough in that plan to reap any employer-matching funds. Read more about different retirement plans.

  • Save for education costs. Like retirement savings, it can be easy to fall behind on savings for your kids’ college tuition. By starting a 529 college savings plan, you can grow your money tax-free – and it remains untaxed if it’s used toward qualifying higher-education expenses. Plus, you might be able to get a state income tax deduction. If you don’t have children, you can still help educate somebody – yourself! Think about opportunities for additional training or schooling that could help your professional advancement and earn yourself a higher salary.

  • Prepay your fun. Sure, if your finances are in great shape, it’s perfectly legitimate to leverage a big tax refund to pay for a great vacation or shopping trip. In fact, that’s actually preferable – why not subsidize something with money you earned throughout the year rather than take on more debt to make the same thing happen? But it doesn’t have to all be spent now – consider funding a Christmas-shopping fund or perhaps save for a big-ticket item that you know you’ll need in the near future.

Your tax return provides a great opportunity to not only have some fun, but also improve your financial health and move toward your goals. Even though it can feel like free money, remember, it’s basically the government giving you back your own money that you overpaid during the year – so reward yourself by using the cash responsibly.

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