Yahoo Finance 7 Smart Ways to Spend a $1,000 Tax Refund
You could be coming into some money soon. According to the Internal Revenue Service, in 2016, 111 million Americans received tax refunds, with the average amount being $2,860.
Of course, you may not be due anything. The IRS expects 30 percent of taxpayers to not receive refunds this year. But let's say you get a refund. What should you do with it? Throw a party? Save the money? Invest it?
If you're looking for ideas, we have them. Now that said, the higher your refund, the easier it is to decide what to do with it. So we're going to assume you're getting something lower than the national average but something high enough to put it to good use -- $1,000.
[See: 9 Red Flags That Could Trigger a Tax Audit.]
Put the refund into a savings account. The national interest rate for a savings account is pretty low -- 0.06 percent APY (annual percentage yield), according the Federal Deposit Insurance Corp. That means over a year's time, your bank account will have an extra 60 cents in it. But rates are expected to rise, and the point of putting money away isn't only to grow it, but to have it accessible if you need it.
Use the refund to pay off credit card debt. Reducing debt, especially reducing high-interest revolving credit card debt, is also a way of saving money, points out Luke Orlando, a Houston-based management consultant with a background in finance.
Orlando says: "When grappling with decisions like this, the question should always be, 'What is my return?'"
He explains that if you are bogged down with debt, and you're paying 17 percent in interest payments, assuming your credit card debt is around $1,000, you'll save a lot more if you use the tax refund to end the debt rather than putting it in a bank account and earning, say, a 1 percent annual return. If you have far more than $1,000 in credit card debt and the thousand won't come close to wiping it out, what you should do with the tax refund may be a little more complicated. It's never a bad idea to reduce debt, of course, but if you don't have an emergency fund, Orlando says that it wouldn't be a bad idea to use the thousand to start one.
Put the refund toward your retirement. A thousand dollars would pad your retirement fund nicely, and it's just enough to get you started, if you haven't begun saving for retirement.
"There are so many more low-cost options today than we had a decade ago," says Kevin Feldman, a certified financial planner and CEO of Feldman Capital, LLC, an asset management advisory firm in San Francisco. "If you don't have a particular goal in mind and are just saving long-term for retirement, I would recommend checking out Vanguard's Target Retirement funds, which are easy to open online, have a $1,000 minimum and there are an assortment of choices based on your age."
Feldman adds: "If you think you'll be doing more investing in the years ahead and want more flexibility, Schwab is also an excellent choice for your first $1,000, which also happens to be the minimum to open an account. Once your account is open, you can buy any of the Schwab exchange-traded funds commission-free."
Another thing to keep in mind: If you have a 401(k) and an employer that matches funds, you may be able to park the $1,000 in there and double your money.
[See: Answers to 7 Burning Tax Questions.]
Use the refund for car or home maintenance. There are certain tasks every homeowner and car owner should do, and if you ignore them, you may pay dearly. For instance, never cleaning your gutters can lead to water pooling around your home's foundation, and you might wind up with a flooded basement.
If paying someone to clean out your gutters seems awfully unsatisfying, what about buying four new tires? Probably also not your idea of a good time, but that's a suggestion from Timothy Wiedman, a retired associate professor of business at Doane University in Crete, Nebraska.
"A great many folks push the limits when it comes to replacing their old tires," Wiedman says.
He estimates that most people could buy a new set of brand name all-season tires for a car or small SUV for about $500. And with the rest of the money?
"If maintenance has also been postponed -- changing the coolant, replacing a 5-year-old battery, or buying new front brake pads, for example -- any of those chores could likely be done at the same time with plenty of money to spare," Wiedman says.
After all, going to a mechanic to prevent problems is cheaper than constantly going to your mechanic to fix problems.
[See: A Checklist for Last-Minute Tax Filing.]
Start a side business with the refund. This is only smart if you were thinking of doing this anyway. Not everyone is cut out for running a business, and you don't want to sink your money into a venture that goes nowhere.
But John Paul Engel, a lecturer of entrepreneurship at the University of Iowa, points out that $1,000 could go toward things like buying a web domain, paying for registering your business, getting business cards and opening a business bank account.
And if you are entrepreneurial, Engel says, "you can turn that unexpected $1,000 into $10,000 or even $100,000."
Invest the refund -- in you. Kenneth Ashe, a project manager at Prudential Financial in Newark, New Jersey, says that if you aren't going to invest the money in the market, try investing in yourself.
"A thousand dollars could easily cover an online course, a gym membership and a number of books. Spending this money on self-improvement is an investment that could benefit you for the rest of your life," Ashe says.
Don't forget that "fun" is in the word refund. No, don't use your entire refund to throw a party. But some personal finance experts do suggest that if you took 10 percent and did something fun with it, that can be smart.
"Splurge with the first $100 -- then do something very boring with the $900, [like] stash it in an emergency fund," says Howard Dvorkin, CPA and chairman of Debt.com, a debt solutions website.
"Think of saving as if it were dieting. If you don't treat yourself to a 'cheat day' every so often, you'll give up on the diet," Dvorkin says. "Well, if you suddenly have $1,000 and act responsibly with all of it, you're likely to cave into emotion later on and overspend on something else."
More From US News & World Report
