If you are one of the lucky ones who not only manages to file his taxes on time, but also receives a hefty refund for your troubles, then you may be tempted to spend your found money on something fun and frivolous. Tempting though it may be to indulge in an unnecessary luxury, it is smarter in the long run to do the responsible thing and invest in your future.
The average tax refund is worth $3,000, and arrives within three weeks of filing the returns. Invested wisely, that kind of cash can have a big impact on your personal finances. Here are some of the best ways to invest your tax refund check once it arrives.
Pay off credit card debt
Financial advisers will tell you the most important thing you can do with extra cash is pay off your debts. If you have multiple sources of debt, target the one with the highest interest rate first. For many people, that’s their credit card bill. Keep in mind, using your refund to pay off a balance that’s carrying an 18 percent interest rate is as good as earning 18 percent on an investment.
Fund your rainy day account
After achieving solvency, the next step to ensuring financial security is creating an emergency fund. In case of a medical emergency, unexpected unemployment or other unpleasant surprise, it is helpful to have three to six months' worth of expenses squirreled away in a “rainy day” account. Bankrate.com recommends parking that cash in a high-yield bank savings account or money market deposit account, since both options allow for easy access to funds as soon as disaster strikes.
Invest in your retirement
If you have a handle on your debts and are confident in your rainy day savings, it may be best to use your tax refund money to focus on more long-term goals. U.S. News & World Report recommends adding your refund to your workplace 401(k) to meet the maximum match from your employer, if you haven’t already maxed it out. If you have, consider bolstering your retirement account even further by opening a Roth individual retirement account. Once you’ve opened a Roth IRA, you can continue adding to this tax-sheltered stream of income each year when your annual tax refund check arrives.
Pay it forward
Retirement is one long-term goal that’s worth putting money into, but if you have children, then their future may seem like an even more essential investment. Two of the most popular options are section 529 plans and Coverdell educations savings accounts. A Coverdell ESA is a tax-advantaged savings vehicle that allows you to save up money for your child or grandchild’s educational expenses. 529 plans are similar, but come in two types — college savings plans and prepaid tuition plans. Speak with a financial advisor and determine which plan works best for you and your offspring.
As tempting as it may be to spend your entire tax refund on some big splurge, there are much better things that can be done with that money. Whether paying off debts, building a rainy day fund or saving for your own or your child’s future, there are many great ways to invest in a brighter tomorrow.
This article is presented by Colonial Buick GMC in Watertown, Massachusetts.