Last year the average tax refund was $3,252, but it’s likely that many refunds will be lower in 2023. Pandemic tax breaks (such as the recovery rebate credit and Advance Child Tax Credit) no longer apply.
With lower refunds, mindful money management is even more important this year. If you have received a refund and want to invest it wisely, here are a few suggestions from our partners at GreenPath Financial Wellness.
1. Pay Down Your Credit Card Debt
While this may be a less exciting alternative to booking a weekend vacation or upgrading your wardrobe, paying down your credit card debt is a crucial step towards creating a healthy financial picture. Put your refund towards the credit card balance with the highest interest rate—this is the card costing you the most in the long run. The benefits of paying down debt are twofold: freeing up funds that would normally go towards high interest and giving your credit score a boost.
2. Create an Emergency Savings Account
How prepared would you be in an emergency? If the mere thought is stress-inducing, you are not alone. According to a recent report, only 43% of adults would pay for an emergency expense from their savings account, and more than 1 in 3 Americans have more credit card debt than savings.
When creating an emergency fund (or even just saving money for a rainy day), you can deposit a percentage of your tax refund into a designated savings account and then set up automated weekly or monthly deposits. Even regular contributions between $10 and $20 add up over time, and when the unexpected happens, you will be less likely to rely on credit cards.
3. Fund Your Future
What are your long-term financial goals? Do you want to build your retirement fund or save up for your children’s future education? It is never too late to start saving, and your tax refund deposit can be a great building block to get your started or lump sum contribution if you have already laid the groundwork with an IRA or 529 plan.
4. Upgrade Your Home
A little investment into your living space can go a long way. Are there any home upgrades that might decrease your monthly energy bills (for example switching to a smart thermostat or installing solar panels)? Might this be the time to replace an outdated appliance or upgrade fixtures in the bathroom?
The benefits here are twofold: in addition to improving the functionality and aesthetic of your home, you will increase the resale value if you eventually want to sell your home.
5. Start a Side Business
If you are someone who is regularly trading business ideas with friends or daydreaming about creative side ventures (like starting a photography business or opening an online store for homemade goods) your tax refund can be the seed money that brings your ideas to fruition.
Whether it’s purchasing a web domain, startup materials, or inventory, you can finally take those first steps towards making a profit (without sacrificing the stability of your current job.)
