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7 Smart Ways to Spend a $1,000 Tax Refund
April 30, 2018

You could be coming into some money soon. According to the Internal Revenue Service, in 2017, 111 million Americans received tax refunds, with the average amount being $2,895.

Of course, you may not be due anything. The IRS anticipates approximately 41 million Americans won’t receive refunds this year. But let’s say you get a refund. What should you do with it? Save the money? Invest it?

If you’re looking for ideas to manage your influx of cash, we have them. But with that said, the higher your refund, the easier it is to decide what to do with it. So, say you receive a significant amount of money, such as $1,000 – still well below the national average – here are some money-smart ways to put your refund to good use.

[See: 9 Red Flags That Could Trigger a Tax Audit.]

1. Put the refund into a savings account. The national interest rate for a savings account is relatively low but getting higher – 0.07 percent APY (annual percentage yield), according the Federal Deposit Insurance Corp. That means over a year’s time, your bank account will have an extra 70 cents in it. But rates are expected to continue to rise, and the point of putting money away isn’t only to grow it, but to have access to it if you need it.

2. Use the refund to pay off credit card debt. Paying off debt is a strategic way to spend your windfall.

“The average credit card balance amongst Americans is at an all-time high, and the savings rate per American is at the second-lowest rate in recorded financial history,” says Mark Kohler, a certified public account and senior tax advisor for TaxSlayer, an e-filing service based in Georgia. “The economy is doing great and we have the opportunity to use any extra money to get out of debt and save for the future.”

And according to a 2018 study from Experian that analyzed the state of credit and debt in America, the average American has a credit card balance of $6,375. Paying off $1,000 wouldn’t eliminate all of that debt, but it would help.

3. Put the refund toward your retirement. A thousand dollars would pad your retirement fund nicely, and it’s just enough to get you started if you haven’t begun saving for retirement. Though some financial firms require a minimum of $5,000 or more to get a retirement account started, there are funds offered by companies, like Vanguard Group, the Charles Schwab Corporation and T. Rowe Price, just to name a few, that have retirement accounts that require a minimum of $1,000 to get started.

[See: Answers to 7 Burning Tax Questions.]

And if you need some motivation to start a retirement account, or to put more money into it, consider how much you can grow your money over time. As Judith Ward, a Baltimore-based senior financial planner with T. Rowe Price, puts it: “Our analysis shows that if you’re in your twenties and saving $250 a month in a tax-deferred account, you could amass almost $900,000 by your retirement age.”

Another thing to keep in mind: If you have a 401(k) and an employer that matches funds, you may be able to park the $1,000 there and double your money.

4. Use the refund for car or home maintenance. There are certain tasks every homeowner and car owner should do, and if you ignore them, you may pay dearly. For instance, never cleaning your gutters can lead to water pooling around your home’s foundation, and you might wind up with a flooded basement.

Alternatively, you could use the money for your car, or keep it in an account and plan to use it when your car needs it. “AAA reports that one in three people can’t pay a $500 to $600 car repair bill without taking on debt,” Ward says. She advises putting money toward home expenses as well. “Home maintenance or repairs could set you back several thousand dollars. Setting aside funds to cover these kinds of unanticipated situations allows you to be prepared without having to raid your retirement savings or pay with a high-interest credit card.”

[See: A Checklist for Last-Minute Tax Filing.]

5. Start an emergency fund. Sure, you’ve probably heard of setting up an account to cover large unanticipated expenses, but do you have one? And if you do have one, would the money pay for something big, like replacing your car or keeping your family financially solvent in the event you lose your job?

“Your emergency fund should be large enough to cover at least six months of living expenses to help you afford daily expenses if you suddenly become unemployed, get a surprise bill or have to deal with another unanticipated expense,” says Matt Gellene, a Boston-based executive at Merrill Edge, an online discount brokerage service.



6. Invest the refund – in you. “One of the most valuable investments anyone can make is in themselves,” says Jeremy Straub, CEO of Coastal Wealth, a financial planning firm in Fort Lauderdale, Florida. “This can include starting a gym membership, visiting the doctor or enrolling in a class. Studies have shown an active and healthy lifestyle and furthering an education benefits nearly all aspects of life.”

Or invest in your kids. “You could start or add to your child’s 529 plan,” says John Petosa, a certified public accountant and professor of practice at Syracuse University’s Whitman School of Management.

7. Don’t forget that “fun” is in the word refund. No, don’t use your entire refund to throw a party. But some personal finance experts do suggest that if you took 10 percent and did something fun with it, that can be smart.

And there’s nothing wrong with spending more than 10 percent if you’re in reasonable financial shape. Ronald Reinstein, a senior wealth advisor with The Financial Guys LLC in Williamsville, New York, says that he often tells clients who are on the right financial track to go “have fun with it with their family. Maybe it’s a weekend trip with the kids to a destination that’s special to them.”

While he would like to see his clients save the money, there’s value to using your money to spend time with loved ones, he says. “It is their hard earned money,” he adds. Still, if you have savings leftover, he recommends adding it to an emergency fund.