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Getting a Tax Refund? 6 Suggestions for Spending It Wisely

tax refund

Last year, more than 97 million Americans received a tax refund averaging $2,763. Now that the tax filing deadline is upon us, millions more Americans will be receiving refunds in the coming weeks.

Perhaps you’re one of these people who’s looking forward to getting a check in the mail soon from Uncle Sam. If so, you should give some thought to what you’ll do with this money — other than splurge on a fancy summer vacation or buy a new big-screen TV.

Here are six suggestions for smart ways you can spend your tax refund:

  1. Beef up your retirement savings account. It takes discipline to practice delayed gratification by contributing your tax refund to your retirement account instead of spending it on something you can enjoy now. But over the long term, you can grow your refund exponentially by saving it for retirement.

For example, if you contributed last year’s average tax refund amount to your retirement plan and earned an average annual rate of return of 6%, in 25 years this could grow to nearly $12,000. Talk about benefitting from delayed gratification!

  1. Build up your emergency savings fund. Some financial experts suggest saving between six and eight months worth of living expenses in a liquid account, like a bank savings or money market account. Financial disasters can strike at any time, so it’s best to be prepared financially before they do.

Depending on how much money you have (if any) in your emergency savings fund, you might consider devoting your tax refund to this before saving it for retirement. Or maybe split it between the two accounts in order to benefit from potential long-term growth while also gaining more immediate financial security.

  1. Pay off some debt. The average U.S. household now owes nearly $16,000 in credit card debt, according to a report published by NerdWallet. If you are carrying credit card debt, one of the smartest things you can do with your tax refund is to devote some or all of it to paying off this debt. Even if your refund doesn’t pay off your debt in full, this strategy will reduce the amount you owe and your interest charges — and also give you a psychological boost when it comes to debt reduction.
  2. Start a college savings account, or contribute to an account you already have. The average cost for one year of college at a public school is about $25,000 — or $100,000 for a four-year education. Using your tax refund to open a Section 529 college savings plan, or contributing your refund to an existing 529 plan, is a great way to get a jump on future college expenses.

Remember: Every dollar you put toward your children’s college educations is a dollar you’re investing in their future. Some studies have indicated that a college education can more than pay for itself over a lifetime in terms of higher earnings and wages — which can make contributing your tax refund to a college savings account a smart idea.

  1. Do some home fixer-uppers. Are there some home repairs or home improvement projects you’ve been putting off for awhile? Putting your tax refund toward this can be a smart move: Not only could it increase the value of your home, but you’ll also enjoy your home more — and your neighbors might thank you.
  2. Create a car replacement fund. The average cost of a new car today tops $36,000, while the average car payment is more than $500 a month. But what if you could pay cash for your next car and avoid monthly car payments altogether?

One of the best ways to do this is to create a car replacement fund. Your tax refund probably won’t be big enough to fund a new car purchase all by itself, but it can provide the foundation for this type of fund. If you contribute each of your tax refunds over the next five years to this fund, you might have enough for a car by then — especially if you buy a quality used car instead of a brand new one.

Finally, some experts say it’s usually OK to splurge just a little bit with your tax refund — especially if you devote most of it to responsible uses like these. For example, maybe you could treat your family to dinner at a nice restaurant or a fun day at a local amusement park.

Please contact us for more guidance and ideas about spending your tax refund wisely.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.