6 things to do with your tax refund other than spend it right away

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If a few thousand dollars landed in your lap, how would you spend it?

That's what many tax filers have been considering this tax season, which ends today, April 18, for most filers. As of April 7, the average 2022 tax refund is $2,878, slightly lower than 2021's $3,175, according to the Internal Revenue Service.

Of course, an IRS refund is merely a zero-interest reimbursement for overpayment on taxes throughout the year. But for many people, refunds can come as a surprise, making them feel like bonus money.

If you receive a large refund, you might want to use that "bonus money" to shore up your finances or otherwise invest in yourself in 2023. You might not receive another cash windfall this year, outside of the income you get from paychecks.

To get you started, here are six smart things to do with your tax refund other than spend it right away.

1. Pay off high-interest debt

High-interest debt is loosely defined, but it typically includes credit with interest rates in the double digits, like credit cards or cash advance loans. Credit cards currently have an annual percentage rate of 20.21%, which is the interest rate charged on your outstanding balance. 

"If your tax refund can make a dent to lower the balance or possibly pay off your credit card, do it," says Nycole Freer, a certified financial planner in California.

That's because the longer you take to pay off debt, the more you pay in interest. If you're able to avoid carrying a balance, you'll free up extra cash.

2. Top up your emergency fund

Financial planners commonly recommend putting aside at least three to six months worth of expenses in case of an emergency, such as losing your job or a surprise medical bill. Unfortunately, 53% of Americans don't have an emergency fund at all.

While your refund might not cover the recommended amount for an emergency fund, anything can help. Try saving at least $1,400, if you can, as that's the average cost of an unexpected expense, according to a 2022 LendingClub survey.

3. Contribute to your retirement savings

Putting extra cash into retirement saving accounts like a 401(k) or individual retirement account (IRA) might not seem very exciting, but it will pay off when you're ready to retire. That's because the money will grow exponentially over time, thanks to compound interest.

Setting aside money for retirement is a good move if you're behind on commonly recommended retirement savings goals based on your age.

4. Set aside money for short-term goals

Another option is to save your refund for large expenses you expect later this year, whether that's holiday gift shopping or a trip you've been planning.

To maximize interest earned on your savings, consider putting your money in a high-yield savings account. The best rates for these accounts — currently over 5% — are typically offered by smaller online banks.

Certificates of deposits and short-term bonds have similar interest rates, but the downside is that money in these investments is locked away for months or years at a time, unless you pay penalties for early withdrawals.

With high-yield saving accounts, you can usually withdraw your money right away. For this reason, they're probably safest spot to park your emergency fund, since you'll never know when you might need the extra cash.

5. Pre-pay bills

If you're feeling tight on cash every month, consider using your tax refund to pre-pay for services you don't expect to cancel in 2023 yet pay regularly, like a heating or a TV streaming bill. Many service providers will let you do this on their website.

"By pre-paying paying a bill like your auto insurance or phone bill, you free up cash flow you can enjoy throughout the year," says Garrett Sorensen, a CFP in Tennessee.

6. Put it toward education

Federal student loan payments have been paused since early in the pandemic, and will remain paused until June 30. With payments likely resuming soon and loan forgiveness still up in the air, it might make sense to set aside your refund for future payments.

Alternatively, you could spend the money on skill-building classes or certificates, which can cost hundreds or thousands of dollars. This could be something related to your job or career, like learning a new language or how to use accounting software like Excel. Taking classes will enhance your skills, which can lead to a higher salary over time.

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How a couple making $123,000 in North Bergen, NJ spends their money
How a couple making $123,000 in North Bergen, NJ spends their money