5 Smart Ways To Use Your Tax Refund
The best case scenario after tax season is receiving a refund. According to the IRS, the average tax refund amount in 2023 is $2,753, which is 9% lower than the average refund of 2022. Your tax refund could assist you in getting ahead in reaching your financial goals for 2023. Instead of spending your money on a shopping splurge, consider these five smart ways to use your tax refund.
Add To Your Emergency Fund
Your emergency funds can be handy if you receive an unexpected bill or have a sudden loss of income. Having these funds explicitly set aside incase of an emergency can prevent you from experiencing financial hardship. The recommended amount of money you should have stored in your emergency fund is three to six months’ worth of expenses. If you have not started an emergency fund or have not reached your goal, go ahead and use your tax refund to build up your rainy day savings.
2. Maximize Your Retirement Contributions
Time is on your side when it comes to saving for retirement, and one additional contribution can accelerate the growth of your nest egg with compound interest. While putting your tax refund into a retirement account can help grow your retirement savings, you can also maximize your contributions to take advantage of the tax benefits. Traditional and Roth IRAs have a contribution limit of $6,500 in 2023 if you are under the age of 50, with an additional $1,000 catch-up contribution for those age 50 and up.
3. Pay Off Debt
Your debts could be holding your back from reaching your financial goals. The quicker you pay off your debt, the more funds you are able to put towards your other goals and save money on interest. If you are only paying the monthly minimum on your high interest debt, you could be barely scratching the surface on your principle. When considering a debt repayment method, you could go one of two ways: start with your highest interest debt or pay off your smallest balances first. Eliminating your debt is one of the first steps to financial freedom.
4. Contribute To Your Savings Goals
Do you have any savings goals set that you are trying to reach? Whether it is a down payment for a car, saving up to purchase a home, or a wedding, your tax refund could help you reach your goals quicker. However, when you are adding to your savings goals, be sure to be utilizing a high-yield savings account. A HYSA can help you keep your funds on pace or even above inflation by earning over time.
5. Invest, Invest, Invest
If your emergency fund is taken care of, your high interest debt is paid down, you’re on track with your retirement contributions, and you have reached your savings goals, take advantage of your tax refund by investing it. Investing is the key to building wealth throughout your lifetime.
Your tax refund can be used to help you reach your financial goals for the year. Our advisors at Mooney Lyons will help guide you through the financial planning process and assist you in making the best decision on how to utilize your tax refund. Schedule a consultation with us today to get started.
Sources:
https://www.securian.com/insights-tools/articles/smart-things-tax-return.html
https://www.citizensbank.com/learning/tax-refund-ideas.aspx
https://www.cnbc.com/select/average-tax-refund-2023/
https://www.bankrate.com/investing/ways-to-invest-your-tax-refund/#boost-emergency-fund
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