Now that tax season is over, many Americans are eagerly awaiting their refunds. With today’s economic climate, high interest rates, and inflation, a BankRate survey found 69% of Americans have anxiety about their returns. The biggest concern is that refunds will not make as much of an impact due to inflation, followed by the fear that their refunds will be smaller than usual. According to early IRS data, the average tax refund will be about 11% smaller in 2023 versus 2022, largely due to the end of pandemic-related tax credits and deductions.
Americans must be wise about utilizing their refunds and avoid treating them as a voucher to splurge on unnecessary items. The 2022 tax return is not the time to have the “YOLO” mentality.
On average, 21% of Americans use their refund to pay bills, 20% to pay off debt, and 7.5% use it to invest. That means roughly 50% of Americans might not be smart with their refunds and will use them for frivolous purchases.
The best way to use a tax refund is to prioritize financial goals, pay off debts, invest in your future, or start an emergency fund.
Firstly, it is important to prioritize your financial goals. Take a step back and look at the bigger picture of what you want to achieve with your money. Whether it is to save for a down payment on a house, invest in higher education, or start a business, having a clear understanding of your financial goals can help guide your decision-making. A tax refund is a great boost toward achieving your dreams.
Secondly, paying off debts is a must for those with outstanding balances on high-interest credit cards, personal loans, or other forms of debt. The average debt for an American adult is $58,604, and 77% of American households have at least some type of debt. These debts can accumulate and result in hefty interest payments over time, causing you to always be behind the 8-ball. By using a tax refund to pay off debt, you can save a significant amount of money in the long run by avoiding high interest charges and finally becoming financially independent. Although most people’s tax refunds cannot eliminate all accumulated debt, making some dent — any dent, in debt is worthwhile. Paying off your debts can also improve your credit score and increase your financial stability, which results in lower interest payments on a house or car.
Thirdly, investing in your future is another smart way to use a tax refund. Often, this means investing in a retirement savings account. Surveys show about 37% of retirees have no savings, and only about 12% have at least the recommended $555,000. Investing in retirement savings, like a 401k or Roth IRA, can help ensure that you are not stuck renting a room or living with family members in your old age. By using a tax refund to invest in the future, you can benefit from compounding interest and potentially see significant returns over time.
Lastly, starting an emergency fund is essential for financial responsibility and the most overlooked financial tool. Only 27% of Americans have a healthy amount of savings that covers more than six months of living expenses. This can provide a financial safety net in case of unexpected expenses or job loss. These funds should be held in a high-interest bearing savings account, so you can earn interest while having access to the money immediately, in case of an emergency.
So instead of blowing your tax refund on unnecessary expenses or splurging on items you don’t need, be smart and utilize it to secure your financial future. YOLO!
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