Getting a big tax refund can feel like winning the lottery. For many people, it’s their biggest paycheck of the year. Every year, about 3 in 4 Americans get a tax refund. The average refund is around $2,300.
Although you’re getting a big tax refund, keep in mind that the money you’re getting back is all yours. It’s not a bad deal for Uncle Sam since he doesn’t have to pay any interest.
One way to be mindful of your tax refund is to put it into an online bank account that earns interest. According to the experts at SoFi, you can “Set up a direct deposit and earn 1.25% annual percentage yield (APY).”
Ways to Spend Your Refund Mindfully
1. Pay Down Credit Card Debt
A lot of the things that we spend money on for our loved ones and ourselves goes on credit cards. Unfortunately, the average APR for credit cards is around 16.26% or more. Carrying a $1,000 balance on a card with a 20% interest rate for six months will cost you around 59 dollars in interest.
If you have a credit card bill that’s bigger than your tax refund, then it’s important to pay it off first. Another strategy is to use the snowball method, which involves paying the lowest balance first before moving on to the next debt.
2. Increase Your Emergency Fund
If you’re one of the lucky ones who has a steady income, then investing the money from your tax return can help build an emergency fund. For years now, financial experts have advised people to squirrel away at least three to six months of their expenses in a savings account or a money market.
3. Jumpstart or Add to Your Retirement Savings
Although it may seem like a long way off, it’s still important to start planning for your future financial needs. Having a solid emergency fund can help prevent unexpected expenses. You can also contribute to your Roth IRA or traditional retirement account to help supplement your income. If you’re under 50, you can contribute up to $6,000. If you’re older, you can contribute up to $7,000.
4. Start a Business
After you’ve spent some time at home, you may have discovered that you’re good at something. For instance, if you’re a passionate painter and crafter, then investing the money from your tax return can help build a website for your new business.
5. Save For College
One of the most important factors that you can consider when it comes to investing your tax refund is establishing a college funding account. According to a study conducted by the US News & World Report, the average cost of attending a public university in 2020 is around $9,687. For private schools, the average cost of attending a private school is $35,087.
Being aware of how you use your money is known as mindful spending. This discipline involves monitoring your spending habits and making sure that you’re fully involved in your financial decisions.