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- During last year’s refund season, the average family received $2,727 back from the federal government.
- If your goal is to build wealth, consider making a smart choice with your money when you have it.
- By using your tax refund wisely, you could save money on interest, build up new income streams, and create long-term wealth that lasts.
The average federal tax refund was $2,727 nationally for the 2017 tax year, and after a tense few weeks and rumors of lower refunds in early 2019, it looks like things are just about back to normal.
Still, you have an important choice to make this year. Will you blow your refund on new furniture? How about a vacation to the Bahamas? Maybe you will look for ways to leverage your refund that could leave you with more money in your pocket later in life.
Experts obviously suggest the latter, especially since your tax refund is "extra" money you may not even need. If your goal is building wealth, consider using your tax refund for these expert-recommended goals in 2019:
Establish an emergency fund
Considering four in 10 Americans didn’t have the funds to cover a $400 emergency last year, stashing your tax refund in a high-yield savings account could be a good idea.
Financial advisor Tricia Rosen of Access Financial Planning said it would be ideal to save up three to six months of expenses over time. "This will prevent you from having to take out high-interest debt in the future," noted Rosen.
Need a smart place to save your emergency fund? Consider these offers from our partners:
Read More: Saving an emergency fund is a good start, but where you put those savings can matter even more
Pay down high interest debt
If you have high-interest debt, then that’s another clear winner in terms of how to spend your refund.
"It’s the same as getting a no-risk return of 14% to 18%, depending on what rate you are paying on the debt," said Rosen.
Not only can paying off debt help you save on interest, but it can increase your cash flow and make it easier to save.
Boost your workplace 401(k) contributions — and snag an employer match
Financial planner R.J. Weiss of The Ways to Wealth suggests taking stock of your tax refund and heading to your workplace Human Resources department. Boost the percentage you contribute to a retirement account like a 401(k), he said, and try to maximize any employer match you can qualify for.
"A 401(k) match is often the highest-returning investment available," he said. "As such, it’s an opportunity that shouldn’t go to waste."
Read More: Here’s how big tax refunds could be this year for people earning between $21,000 and $266,000
Make a lump sum contribution to an IRA
Brandon Renfro, a financial advisor and the Assistant Professor of Finance at East Texas Baptist University, also suggests contributing money to a traditional or Roth IRA provided you qualify.
You can contribute up to $6,000 total across both accounts in 2019, and contributions to a traditional IRA may be tax deductible depending on your income and other factors.
Invest in real estate
Ready to dive into real estate? Consider using your refund as a down payment on a starter home or rental property, said Renfro.
If you don’t want to own physical land or buildings but you still want to invest in real estate, you can also invest into an REIT, or real estate investment trust, via most online brokerage accounts. Real estate platforms like Fundrise also let you invest money in to real estate notes that can help you grow your net worth over time — and without the hassle and stress of managing rental property.
Build new income streams
Don’t rule out leveraging your tax refund to build a business or additional revenue stream, noted Renfro. If you have a unique idea that needs funded or a side hustle idea that requires equipment or an initial investment, your tax refund may be the answer to your prayers.
Renfro also says your refund may be helpful when it comes to advertising a small business you already have, whether you make custom furniture, tutor college kids, or bake wedding cakes.
"Think about using some of your refund to promote your business," he said. "The increased exposure may boost your income and possibly allow you to sustain even greater savings and wealth building."
Open an account with a robo-advisor
If your other financial ducks are in a row, CPA and financial expert Riley Adams, who blogs at Young and the Invested, says to look to robo-advisors like Betterment and Wealthfront for your investing needs.
"Robo-advisors take varying amounts of money and automate their investments into low-cost, diversified investments," he said.
Low account minimums are one reason robo-advisors have gained steam over the past few years, and another benefit is lower fees. Where financial advisors may charge 1% to 2% a year for their services, robo-advisors usually charge between .25% and .50% of your portfolio annually.
Betterment, which has a $0 account minimum for its digital product, charges a fee of .25% a year for digital portfolio management for nonbusiness investors; Wealthfront, which has a $500 minimum, also charges .25%.
See Also:
- Saving an emergency fund is a good start, but where you put those savings can matter even more
- We asked financial planners for their favorite high-yield savings account, and almost everyone said the same thing
- We compared Credit Karma Tax and TurboTax for filing your taxes — here’s the verdict
Source: Business Insider – holly@clubthrifty.com (Holly Johnson)