{"id":9534,"date":"2022-10-27T13:00:00","date_gmt":"2022-10-27T19:00:00","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=9534"},"modified":"2024-05-06T12:56:45","modified_gmt":"2024-05-06T18:56:45","slug":"should-you-save-your-tax-refund-or-pay-down-debt","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/credit-101\/should-you-save-your-tax-refund-or-pay-down-debt.html","title":{"rendered":"What to do with your tax refund: 7 ideas to consider"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.<\/em> See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

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If you want to put your tax refund to work, you could use it to pay down debt, start an emergency fund, add to your retirement account, boost your savings, increase your quality of life, invest in the stock market or invest in credit repair.<\/h2>\n<\/div>\n\n\n\n

Filing income taxes can be stressful and time-consuming, but the effort is worth it when you see you\u2019ll be getting money back. Millions of Americans file a tax return each year. According to data released by the IRS<\/a>, over 26 million people filed their taxes in 2022 and received an average return of $2,323. If you have that amount of money hitting your bank account, it\u2019s hard not to imagine all the financial possibilities suddenly available to you. <\/p>\n\n\n\n

Keep in mind this is your own money being returned to you, which means it should ideally benefit you in some way. Whether you want to splurge a little or spend it on something practical, there\u2019s no right or wrong way to approach using your tax refund\u2014your decision should depend on your current financial situation. Consider these seven ways you can spend your refund and make the most of your hard-earned money.<\/p>\n\n\n\n

1. Pay down debt<\/h2>\n\n\n\n

If you\u2019re holding on to any high-interest debt, such as credit cards, private student loans, personal loans or a debt consolidation loan, here\u2019s your chance to reduce that amount<\/a>. Using the avalanche method, look for debts that have a double-digit interest rate and make paying those off your top priority. The higher interest rates cost you the most money. Lowering the amount of debt means you\u2019ll pay less in interest every month and reduce your payments. <\/p>\n\n\n\n

Next, you can concentrate on longer-term loans, such as mortgages and auto loans. These typically have lower interest rates, which means they\u2019re the least expensive types of debt. If you\u2019re behind on any household or utility bills, your tax refund can be used to catch up and prevent accumulating late fees . Missing too many payments can eventually hurt your credit, so your tax refund is a great way to get your finances back on track. <\/p>\n\n\n\n

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2. Start an emergency fund<\/h2>\n\n\n\n

Having an adequate savings account can be a lifesaver in times of unanticipated hardship, such as a severe illness, car accident, job loss or natural disaster. Building an emergency fund<\/a> with your refund can help you manage these unexpected events without experiencing great financial strain.<\/p>\n\n\n\n

Many experts recommend having at least three to six months\u2019 worth of emergency savings to cover your rent, bills and other necessities in case of job loss or injury. However, having even a few hundred dollars set aside for car repairs, medical bills or home expenses can serve as a cushion in times of financial distress.<\/p>\n\n\n\n

The IRS allows you to split the money multiple ways via direct deposit, meaning you can send part of your refund directly to an emergency account. Even if you\u2019re tempted to spend your refund on fun things, this can help you avoid splurging or overspending. <\/p>\n\n\n\n

3. Add to your retirement account<\/h2>\n\n\n\n

If you\u2019re caught up on bills and have an emergency fund in place, that extra cash from your tax refund could be used to support long-term financial goals. It\u2019s never too early to start thinking about retirement plans<\/a>. Whether you have an individual retirement account (IRA) or an employer-provided 401(k) plan, contributing your tax return can boost your savings and help out your future self.<\/p>\n\n\n\n

You can also put that money toward the next generation if you have kids. Investing your tax return in a Custodial IRA or 529 plan can help fund future college expenses and give you less to worry about down the road. <\/p>\n\n\n\n

4. Boost your savings<\/h2>\n\n\n\n

Is there a trip you\u2019ve been wanting to take or a home addition you\u2019ve been thinking about? Maybe you\u2019re hoping to stop renting and become a homeowner in the foreseeable future but are unsure how to acquire the funds for closing costs or a down payment for a mortgage loan. Your tax refund can be used as a head start. Set some of that money aside in a savings account. Once you put a little away, it may motivate you to keep contributing and watch that number grow. <\/p>\n\n\n\n

You can also start a separate savings fund. Having money available for unexpected adventures or purchases, such as new appliances, a gaming console for family fun nights or small day trips, can allow you to live spontaneously without worrying about breaking the bank.<\/p>\n\n\n\n

5. Increase your quality of life<\/h2>\n\n\n\n

The funds you receive from your tax return may be exactly what you need to take the next step in your career. If you\u2019re looking to gain new skills in your industry to score a job promotion, your refund can be used to cover tuition costs for courses or a certification program. This may also make you eligible to claim the Lifetime Learning credit on next year\u2019s taxes, which can result in more money to fund future endeavors. <\/p>\n\n\n\n

You can also invest the money into your side hustle to make it more lucrative. If you\u2019ve been crafting or knitting on the side to make a little extra cash, upgrade your tools and materials to increase the quality of your products and hopefully increase your cash flow.<\/p>\n\n\n\n

Another option is to use the money to improve the quality of your home. If you want to renovate your bathroom or install a pool in the backyard, the tax refund may be enough to help you get started. <\/p>\n\n\n\n

6. Invest in the stock market<\/h2>\n\n\n\n

This option certainly isn\u2019t for everyone, but if you\u2019re interested in learning more about investing, your tax return may finally open that door. While the stock market\u2019s fluctuations make it seem like a riskier choice, it may be beneficial in the long run if you\u2019re willing to wait it out and don\u2019t need the money right away. Historically, the stock market has offered better returns<\/a> than most CDs, bonds or savings accounts, which can make the wait worthwhile. <\/p>\n\n\n\n

If you\u2019ve never invested before, start by determining how you want to invest and open an online brokerage account. This is the quickest and least expensive way to buy stocks. You can then figure out what you want to invest in and how much you can realistically contribute. <\/p>\n\n\n\n

7. Invest in credit repair<\/h2>\n\n\n\n

A good credit score<\/a> can help you save money in the long run. For instance, it can help you get approved for loans with lower interest rates, which means your monthly payments and the amount you owe will be lower. If your credit has been damaged by inaccurate or unfair negative items on your credit report, consider using your tax refund to invest in credit repair services. <\/p>\n\n\n\n

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Credit repair is a multistep process that involves auditing your credit to determine what\u2019s affecting your score. It can help you figure out what factors are preventing you from getting approved for qualifying lines of credit, such as a mortgage or car loan, and you can see if there are any errors that need to be fixed. Then you can begin taking the necessary steps to repair your credit and establish new healthy spending habits.  If you\u2019re hoping to work on your credit, Lexington Law offers services that can help. Take our free credit assessment<\/a> or contact us today to start the journey toward obtaining better credit. <\/p>\n\n\n\n