The IRS has already issued 22 million refunds, at an average of $3,536. That’s $700 more than last year when the average refund was just over $2,800. With the help of professional accounting and tax preparation services, you can maximize the amount of your return, and use the money to invest in your future.
At Waters Hardy, our expert accounting services team can help ensure professional tax planning and compliance to maximize the return you’re owed. Once you receive your tax return, it’s up to you how you use it. Our professional advice is to carefully examine your financial situation to make the most of your tax refund.
If used wisely, a lump sum of this amount could go a long way in helping to improve your financial health. While it may be tempting to spend your money right away, don’t waste your money on something that will quickly fade away. Instead, consider using all, or a portion, of it to enhance your finances. Using your tax refund responsibly is an investment that can help you build a better financial future or fund opportunities that matter the most to you.
Here are some smart ways to invest in your financial future with your tax money.
1.) Pay Off Credit Cards and Debt
Covid-19 has triggered unprecedented financial challenges for many individuals and families. The pandemic was regarded by 47% of individuals as a major contributor to increasing debt.
Whether it’s credit cards, student loans, or medical bills, living with debt can be all-consuming. While your tax refund may not be large enough to wipe these balances clean, you can use it to make a dent in your debt.
Credit cards tend to be the debt with the highest interest rates. The average APR on variable-rate credit cards is 16.28%. Using your tax refund to pay off high-interest debt could be the best use for the money. The average balance on credit cards was $5,525, according to data from November 2021. As an example, if you paid only $100 a month toward the $5,525 balance it would take 94 months to pay off and cost an additional $3,990 in interest.
Two Approaches to Pay Off Credit Card Debt
- Avalanche method: Focus on paying off the debt with the highest interest rate. Once that is paid off, move on to the balance with the next-highest rate. This method saves the most money.
- Snowball method: Pay off the smallest balance first for the sense of accomplishment, and then work your way up until you finish.
2.) Invest in Saving for the Future
One way to build wealth that lasts is to invest your tax refund. Let that money, and the money from future tax refunds, grow and you’ll put yourself on the path to financial independence.
For example, if you receive a $3,000 refund, invest it, and over the next 10 years earn a 6% average annualized return, and you’ll have more than $5,000 in that investment account. That’s a great return on investment. It gets even better if you commit to investing your $3,000 refund for the next 10 years. You’ll have more than $40,000 in your investment account after allowing compounding and earnings to work their charm. Also, if you stay disciplined and continue to invest your $3,000 refund every year for two decades for a total of $60,000 invested, after a 6% average annual return, you’re looking at around $120,000, or double the total amount invested.
3.) Invest in Your Future Retirement
While it may not be the most glamorous way to enjoy your money now, investing in your future is important at any stage of your career. Put your tax refund money into your current employer’s retirement account or open a tax-advantage investing account like an IRA if you don’t already have one.
You can use your tax refund to contribute to any retirement plans you have, 401(k) or an IRA. In 2022, you can contribute up to $20,500 to a 401(k) and $6,000 for traditional and Roth IRAs. Additionally, if you’re over 50, you can contribute an extra $6,500 to your 401(k) and $1,000 to an IRA.
It may be hard to prioritize something that seems so far away, but when you see that investment grow over time you won’t regret the choice you made.
Saving for retirement may feel easy to postpone, but the truth is that too many people approach retirement age and realize that they’re not financially ready. Which is something they wish they had started sooner rather than later.
4.) Start a College Savings Account for Your Children
If your family is financially able to do so, using a tax refund to jumpstart education savings is a great opportunity to support long-term goals.
Many 529 college savings plans offer tax benefits that are better than using a simple savings account. Not only can you get a tax deduction or credit for contributions, but your earnings increase on a tax advantage basis. Essentially, you can withdraw the funds tax-free provided that the money is used for qualified education expenses.
At Waters Hardy, we work efficiently so you can get the most out of your investment accounts.
2022 is the Year for Smart Tax Refund Investment
Remember, the government isn’t sending you a bonus check. You worked hard for this money and it’s been yours from the start. Don’t treat your refund check any differently than your monthly paycheck – use it wisely!
If you’re expecting a tax refund this year, that’s great news! It may be tempting to spend it all at once, but a tax refund is a great opportunity to set yourself up for a brighter financial future. Waters Hardy is here to offer you expert advice in accounting and tax planning services so that you can maximize your return and optimize your financial growth in the future.