If you receive just a small tax refund from the federal government, congratulations! A small tax refund — or even owing a little money — is actually a sign of a well-managed financial life. Don’t get down if your neighbor boasts of getting a $10,000 check, because receiving a large tax refund means you’ve essentially given the government a tax-free loan of your money. It’s better to use that money throughout the year for your own purposes.
If you do receive a small tax refund, however, put it to work immediately rather than let it sit idle in a low-interest account. Here are 10 ideas for how to use your tax refund, even if it’s not very big.
Pad Your Emergency Fund
With just a small tax refund, one of the best things you can do is beef up your emergency fund. Even if you already have an emergency fund — and kudos if you do — most Americans have far less than the oft-recommended “three to six months” of funds set aside.
If you earn $60,000 and live paycheck to paycheck, for example, the recommended amount in your emergency fund would be $15,000 to $30,000, but studies show that nearly 56% of Americans would have trouble covering an unexpected expense of just $1,000.
Add to Your Investments
Thanks to the introduction of zero-commission and fractional-share investing, it’s never been easier to add small sums to your portfolio. If you receive a $400 tax refund and are a big fan of Amazon stock, for example, you can easily add to your position by buying about 0.14 shares at current prices. In the not-too-distant past, that would not have been possible, as you would have been required to purchase at least one share, about $2,957 as of March 3, 2022.
Additionally, the purchase wouldn’t have made financial sense, as commissions would have eaten up a good portion of your investment. Nowadays, it’s simple to add a small amount to your investments, and it’s also a prudent idea of where to put a small tax return if you have a long-term perspective.
Put It Toward Home Renovations
Any investment that can give you a return on your money is usually a good option. If you own your home and have been putting off certain repairs, that can be a great use for your tax refund. For starters, many home repairs or renovations can add value to your home, making them a great investment. A tax refund is also a source of “found money,” meaning the money for those updates won’t have to come out of your day-to-day cash flow.
If you’re due a small tax refund, that can be a great time to update minor items around your house, such as fixing any leaks, updating shower fixtures or electrical outlets, or adding some touch-up paint where needed.
Pay Down Credit Card Debt
Credit card debt is one of the largest impediments to the generation of wealth. Most consumers that carry credit card debt don’t do it by choice, but rather because their monthly cash flow isn’t sufficient to pay it off. Using your tax refund to pay down your debt could be one of the smartest financial moves you’ll ever make.
With interest rates typically running in the 15% to 20% range, credit card debt can rapidly get out of control, and there are few if any investments that can generate those types of returns. If you’re saddled with this type of debt, consider your tax refund a gift and use it to eliminate that drag on your wealth.
Make an Additional Mortgage Payment
Mortgage debt is considered “good debt,” in that it’s used to purchase a wealth-generating asset and carries tax benefits as well. However, it’s still the single largest expense in the monthly budget of most Americans, and a significant drag on cash flow.
If you’re looking to pay down your mortgage debt in a hurry — and you should speak with your financial advisor to see if this is a good choice for you — consider using your tax refund to make an extra mortgage payment. When it comes to knocking down debt, even small amounts add up, particularly in the case of a long-duration obligation like a 30-year mortgage.
Take Care of Things You’ve Been Putting Off
If you’re like most Americans, you have a list of things that you should get done that you have been putting off, often for financial reasons. A small tax refund can be a great way to start checking things off that list.
For example, maybe you’ve been putting off going to the dentist because you don’t have dental insurance, or perhaps your car needs new tires but there’s just no room in the budget. Take advantage of your tax refund and eliminate your excuses for not getting these things done.
Build Your Skills
Oftentimes, the best investment you can make is in yourself. If you’re just starting out with your career, for example, the more skills you can show a potential employer, the more likely you’ll be able to score a good job with better pay.
You can use your tax refund to take online or in-person classes or gain additional certifications so that you are more marketable. If you’re an older worker, acquiring additional skills can be even more important so that you can keep pace with younger workers who may have more cutting-edge skill sets.
Contribute to Your Retirement Accounts
A tax-advantaged retirement account is one of the best places you can put your money, whether it’s from a tax refund or some other source. If you’re used to making automatic contributions to your employer’s 401(k) plan, you may be surprised to learn that most plans allow you to add additional funds at any time.
If you have your own IRA account, you can similarly add more money whenever you’d like, as long as you don’t exceed the annual contribution limits. Not only will you have a larger nest egg by the time you retire, but you’ll also lower your tax bill for the year you make your contribution.
Buy Life Insurance
Life insurance is a cost that seems like an expense but is really an investment. Although you’ll never see the financial benefits of an insurance policy on your own life, it could be critical to the survival of your family if you die prematurely.
Most advisors recommend taking out enough life insurance to leave your family in a financially strong position if you die, which may include covering everything from an existing mortgage to additional funds for schooling, funeral expenses and any other outstanding debts. A small tax refund may not get you a large policy, but you’ll at least get some coverage immediately and have the option to add to it in the months and years to come — perhaps with next year’s tax refund as well.
If your financial life is set and you don’t really need to add money to your emergency fund, retirement accounts, insurance policies and the like, a final option would be to donate your tax refund. Not only will you help out individuals or institutions that are in more need than you are, you’ll also receive your own financial benefit in the form of a tax deduction.
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