Yahoo Finance Tax Day 2024: 7 Ways To Enjoy Your Refund Without Draining It
This year, the average tax refund amount is $3,182, according to the IRS. That’s a hefty chunk of cash, no matter how you look at it.
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If you’re getting a tax refund, even if it’s smaller than the average check, it’s still cause to celebrate. And celebrate you should — but with some restraint.
It’s OK to use some of your refund when you get it, but you shouldn’t waste the opportunity to invest it in other things. Here are some of the best ways to enjoy your refund without completely draining it.
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Splurge a Little (But Also Build an Emergency Fund)
You can use your tax refund to splurge a little, such as on a small trip or on that new phone you’ve been eyeing. But it’s also wise to build financial security for yourself.
“Utilizing your tax fund strategically can be an easy way to stay on top of your financial goals for the year,” said Steve Sexton, CEO of Sexton Advisory Group. “For example, if you haven’t fully built up 3-6 months’ worth of expenses in your emergency fund, this would be my first allocation so that you’re covered in the event of an unexpected medical emergency, accident or job loss.”
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Having an emergency fund can do wonders for your peace of mind, since you know you have a cushion in case something happens. But what should you do if you’ve already got an emergency fund?
“If your emergency fund is fully funded,” Sexton said, “consider putting your tax refund towards paying down high-interest debt, prioritizing anything with an interest rate of 7% or higher first. Paying down your balance will save you money in the long run.
“If high-interest debt isn’t a concern for you, consider contributing your tax refund to a retirement account, like your Roth IRA. Adding extra funds to your retirement accounts sooner rather than later gives you the ability to reap the rewards of compound interest.”
Once you’ve done this, you can splurge more on the things you want right now.
“If there’s money left over after you’ve considered the potential allocations above,” Sexton said, “then feel free to use what’s left for ‘fun’ — whether it’s a spontaneous getaway or splurging on an item of you’ve been eyeing — as a reward for using your tax refund to make sound financial decisions.”
Invest In Experiences, Not Things
Before you spend your refund on material possessions, ask yourself what will bring you true happiness. It might very well be experiences — or anything else that lets you build memories.
“Remember, that impulse purchases aren’t what create long-term fulfillment,” said Ruchi Pinniger, founder and CEO of Watch Her Prosper. “Consider what would bring you the most enjoyment, such as experiences, weekend getaways … spa day pampering or simply enjoying some of your favorite hobbies or activities.”
Use a Portion for Other Investments
Say your tax refund is $2,000. You can spend perhaps $500 and invest the rest. This will allow you to enjoy it while still being smart with the extra money.
Christian Putnam, a CPA who is owner of Augur CPA, suggested depositing your refund into an educational savings account such as a 529 plan. If that doesn’t make sense for you, you could instead purchase U.S. savings bonds or CDs through your bank. Just be aware that there could be early withdrawal penalties.
Spend Half, Invest Half
One easy way to enjoy your refund without draining is to use half for fun and save or invest the other half.
“The temptation to spend that refund can be a bit overwhelming. Tax refunds can be wonderful for going on a shopping spree or splurging on that new electronic device, or even as a down payment on a new vehicle,” said Gary Knode, president at Safe Harbor Financial. “However, it’s also an excellent opportunity to practice a bit of discipline and put a portion of that refund into your investment account or retirement account.
“If you have a Roth IRA, contribute a portion of that refund to that account. If you don’t have a Roth, this would be a perfect opportunity to start one. Make a pledge to yourself that you’ll use half of the refund check for a Roth. If you can’t do half, that’s OK; just do something. A little bit of something is better than 100% of nothing. Your future retired self will thank you. It’s OK to have some fun with that refund check, but saving a portion will be rewarding in the long run.”
Spend, Save and Give
“The best way to avoid blowing the entire refund is to have a plan for it, before the money arrives,” said Corey Noyes, founder and lead planner at Balanced Capital. “There are three things you can do with money: Spend it, save it and give it. I usually recommend you do some of all three.”
Deciding how much money should go toward each category is up to you and your personal circumstances. Even if you allocate a small percentage to saving and giving, for example, you’re still doing something worthwhile with the money.
Split Your Refund Into Thirds
If a 50/50 split doesn’t work for you, or if you want something more specific, consider dividing your refund into thirds.
“A strategy I often recommend, and have applied personally, involves dividing the refund into thirds,” said John F. Pace, CPA at Pace & Associates CPAs. “One-third of the refund could go towards an immediate, tangible reward — perhaps a modest getaway or a much-wanted gadget. This allows you to satisfy the immediate gratification urge without depleting the entire refund.”
Once you’ve allocated a third for things you want right now, Pace suggested using the rest for future goals.
One-third can go into a diversified, growth-focused investment portfolio. The other third can go into an emergency fund or toward high-interest debts. If you’ve already got those covered, you can always split your refund more evenly across investments and spending.
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This article originally appeared on GOBankingRates.com: Tax Day 2024: 7 Ways To Enjoy Your Refund Without Draining It
