If thousands of dollars fell into your lap, how would you spend it?
That’s what many taxpayers were considering filing their tax returns for the season ending today, April 18th. According to the Internal Revenue Service, as of April 7, the average tax refund for 2022 was $2,878, slightly below the $3,175 for 2021.
Of course, the IRS refund is just an interest-free refund for tax overpayments throughout the year. But for many people, refunds come as a surprise and feel like bonus money.
If you receive a large payout, we recommend that you use that “bonus money” to bolster your finances or invest in yourself in 2023.Aside from the income you get from your paycheck, this year, you may want to invest in another. You may not receive any cash.
To get you started, here are 6 smart ways to get your tax refund beyond spending it right away.
High-interest debt is loosely defined, but typically includes credits with double-digit interest rates, such as credit cards and cash advance loans. Currently, the annual interest rate for credit cards is 20.21%. This is the interest charged on the outstanding balance.
Nycole Freer, a certified financial planner in California, said:
That’s because the longer it takes to pay off the debt, the more interest you pay. If you can avoid carrying balances, you can free up excess cash.
Putting extra cash into a retirement savings account like a 401(k) or an individual retirement account (IRA) may not seem very appealing, but it pays off when you’re ready to retire. . This is because your money grows exponentially over time thanks to compound interest.
If you’re falling behind the retirement savings goals that are commonly recommended based on your age, it’s a good idea to set aside money for your retirement.
Another option is to save on reimbursement for large expenses you anticipate later in the year, such as holiday gift shopping or planned trips.
To maximize the interest you earn from your savings, consider putting your money in a high-yield savings account. The best rates for these accounts (currently 5% or higher) are usually offered by smaller online banks.
Interest rates on certificates of deposit and short-term bonds are similar, but the downside is that the funds in these investments are locked for months or years at a time unless you pay early withdrawal penalties.
High-yield savings accounts usually allow you to withdraw your money immediately. For this reason, it’s probably the safest place to store your emergency funds, as you never know when you’ll need extra cash.
If you find yourself short on cash each month, consider using tax refunds to prepay for services you pay regularly, such as heating or TV streaming bills, although you don’t plan to cancel in 2023. please. Many service providers allow you to do this on their website.
Garrett Sorensen, CFP in Tennessee, said: