How to Put Your Tax Refund to Work for You

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Tax refund day is always a good day, and while going on a shopping spree can be a form of retail therapy, there may be a better way to spend your money.

Whether it be saving for retirement, paying of loans and credit cards, or making investments, figuring out a way to save even a portion of your refund and reallocating it could be the means to help your financial future.

How Much Are We Getting? The average refund in 2020 was $2,741, and that figure has held pretty steady for the last couple of decades. But that kind of cash infusion can make a real difference for many people, assuming they use it wisely.

Why Do We Get Refunds at All? The short story is that many people overpay their state and federal taxes over the course of theyear as they’re withdrawn from their paychecks. Once you calculate your return your actual tax liability might be different than the assumptions made by your payroll department. The result: A refund from the government that returns that overpayment to you.

Tl;Dr: It’s your money all along, the government has just been “borrowing” it all year.

Make It Work: What’s the best way to use that $2,700?

  • Make a plan for it. Don’t just splurge, think about what you really need from that money.
  • Pay off high interest debt first. Goodbye credit card.
  • Address any installment loans next. These are things like mortage loans, car loans, student debt, etc.
  • Start any emergency fund or top yours off if you already have one.
  • Invest, but don’t go crazy after meme stocks. A good index fund is a smart idea for your extra cash.
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