Resist the Urge to Splurge: 5 Smart Things to Do With Your Tax Refund
It’s that time of year again. Time for Uncle Sam to make it rain.
It’s tax season, and that means you’ll probably get a federal income tax refund. It’ll probably be a nice chunk of change, too.
Nearly 80% of U.S. tax filers receive a tax refund, and the average refund is about $3,000, CNN Money reports. So this time of year, roughly half the country gets a sudden financial windfall.
It feels like free money, doesn’t it? All that coin is gonna be burning a hole in your pocket so bad.
It’ll be so tempting to blow it on something fun and extravagant — a beach getaway, a crankin’ home theater system, maybe that sweet new phone you’ve been eyeing. Fly out to Coachella or Bonnaroo for some live music. New clothes, new shoes.
You totally deserve it, whispers the devil on your shoulder. Time for a shopping spree! Woot!
Stop. Resist the urge to splurge. Be smart and put that newfound money to good use.
What to Do With Your Tax Refund to Get the Most Bang for Your Buck
What’s a smart thing to do with your tax refund? We have a few suggestions.
1. Get it out of Sight — and out of Mind
Funnelling your refund directly into a savings account will help you avoid the temptation to spend it.
Heck, at least save some of it.
Did you know you can have the IRS direct-deposit your tax refund in up to three different accounts? Use IRS Form 8888 to designate which accounts. You could split the money between a checking account, a savings account and an IRA.
“By splitting your refund,” the IRS says, “you get the convenience of directing some of your refund to your checking account for immediate needs and sending some to savings for future use.”
2. Invest in Your Future
Your tax refund is a rare opportunity to jump-start your investment game. If you’re not investing yet, you’re missing out on a smart way to make money.
An easy way to get started is Stash, a popular micro-investing app. It lets you start investing with as little as $5. It funnels your money into a set of simple investment portfolios reflecting your beliefs, interests and goals.
You can set it up to automatically pull a specific sum of money from your bank account at regular intervals, so you can grow your investments over time. Or you can drop a big chunk of money in there — like a tax refund.
Stash charges a $1 monthly fee (the first month is free) for balances under $5,000.
If you sign up through this link, you’ll get a $5 bonus when you make your first investment — that’s like five months free.
3. Invest in Real Estate
Want to try real-estate investing without playing landlord? You can get started with a minimum investment of $500 — and hey! Now you’ve got $500.
Through the Fundrise Starter Portfolio, your money will be split into two portfolios that buy private real estate all over the U.S.
Through Fundrise’s online dashboard, investors can see exactly which properties are included in their portfolios — like a set of townhomes in Snoqualmie, Washington, or an apartment building in Charlotte, North Carolina.
Fundrise lists an average annualized return of 11.44% in 2017. Investors pay 1% in annual fees — a 0.85% asset-management fee and a 0.15% investment advisory fee.
Investors can earn money through quarterly dividend payments and potential appreciation in the value of their shares, just like a stock. Cash flow typically comes from interest payments and property income (e.g. rent).
4. Boost Your Retirement Savings
Unfortunately, you can’t have your tax refund deposited directly into your 401(k) account, assuming you have one. But you can have the IRS deposit the money into an IRA. That’s an individual retirement account you can set up and put money into without going through an employer.
There are tax advantages, too. Similar to a 401(k), you won’t pay taxes on any money you contribute to a traditional IRA.
Here’s another strategy: If you aren’t maxing out your 401(k) plan, now’s a good time to bump up your contributions by at least 1%. Your tax refund could give you enough financial cushion to feel comfortable doing that.
Now, you just need to make sure your 401(k) is doing what you need it to. However, tapping into that account and deciphering the information — or lack thereof — can be hard.
There’s a robo-advisor for that. Blooom, an SEC-registered investment advisory firm, will optimize and monitor your 401(k) for you.
It gives you an initial 401(k) checkup for free, and you’ll get to know your account a little more intimately. Find out if you’re paying too many hidden fees, have the appropriate amount invested in stocks versus bonds, that kind of fun stuff.
After that, the tool is $10 a month to use to continue to monitor your retirement account. Let Blooom know your target retirement age, and it can help you get there by investing more and less aggressively.
5. Get a Month Ahead on Your Rent or Mortgage
The rent is too [email protected]$# high! It’s no secret that housing in the U.S. is becoming less and less affordable. Low-income folks are the worst off here, but “middle-income families are also getting squeezed,” says the Brookings Institution.
If you’re like many of us, your selfish need to sleep indoors is eating up a big chunk of your income.
With a tax refund, you can do more than keep up. You can get ahead. Use your refund to make an extra month’s rent or mortgage payment (or at least stash it for that purpose). It’s a simple way to keep your peace of mind in case times get tough again.
Remember, resist the urge to splurge.
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He always gets a tax refund.
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This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can't personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.