Have fun with your tax refund but make sure that fun lasts longer with these 6 ideas to make your tax refund go farther.
It’s tax day and many are scrambling to get their returns in before the deadline. Hopefully you are already done and are expecting a big check from Uncle Sam. As you march around the house giddy thinking about how you’ll spend it, wouldn’t it be great if you could make your tax refund go farther?
You’re not alone in your joy. More than 80% of Americans are expecting refunds with the average refund check being just over $3,000 for the 2014 tax year. That is some pretty decent dough, an extra 6% on the average household income, and could go a long way to that new “me-me-me” gift you’ve been wanting.
By the way, if you didn’t get anything back, don’t feel too down on yourself. You likely made a pretty enviable income or didn’t have much deducted for your taxes through the year. I don’t get much back each year because I max out my deductions and withhold almost nothing from my checks. Why am I going to give the IRS an interest-free loan throughout the year when I can just send a check in April?
If you’re looking for ways to get a bigger refund check next year, or just want to save on taxes, check out an earlier post: 16 Easy Money Tax Tips for Year-Round Savings.
So back to the fun part, you’ve got “free” money and want to spend it. Go ahead and have a little fun, you worked hard all year and deserve to enjoy life. But wait! Don’t spend all of it at once. Check out these 6 ways to make your tax refund go farther.
6 Ways to Make your Tax Refund Go Farther
Build your credit score
Paying off high-interest debt is going to be a double-benefit. First, you save on interest that you would have paid in the future. Paying $1,500 in debt could save you $300 a year at a 20% credit card rate. Paying off high interest debt is also going to lower your debt-to-income ratio and could improve your credit score. A higher credit score means offers for lower-rates and more interest savings down the road!
Take advantage of tax credits
There are a few tax credits out there but my favorite are the Residential Energy Efficiency Property Credit and the Nonbusiness Energy Property Credit. The nonbusiness credit program was set to expire last year but may get extended. The first program is set to run through 2016.
You can get a maximum of $500 credit for all years combined that you put it on your return. The credit is for 10% of the cost of improvements, so you max out at $5,000 worth of upgrades. It isn’t as great a saving as some of the energy credits allowed in 2010 but it still helps to lower your utility bill, and that can be a huge benefit for those in the northern states.
Classes or save for college
Research firm Payscale found the return on a college education to be just under 12% a year on average. That’s the extra money you’ll make through your lifetime against the money spent and lost wages while attending college. It’s a decent return, about 5% above the long-term average on stocks, but it only tells part of the story.
The benefit you get from having more control over your employment opportunities and just getting more offers is worth way more than the mathematical return. Besides being able to pick a job in which you can be happy (or at least not hate everyday) there is a certain level of pride you’ll get from accomplishing higher education. Even at that 12% annual rate, investing $1,500 in a college education is worth nearly $45,000 over 30 years.
Invest in dividend stocks
This one really applies to any investing but I like dividend stocks because they’re typically more stable and will send you a check every three months. Stocks in the S&P 500, the largest companies in the United States, pay a dividend yield of 1.9% on top of yearly appreciation. The SPDR S&P Dividend ETF (NYSE: SDY) pays a slightly higher yield of 2.24% and focuses on mature companies with higher payouts.
Want an extra boost on your investments? Make sure you max out your retirement savings contributions each year. Putting that same $1,500 in an IRA means you could save as much as $800 in income taxes and will not have to pay taxes on all those dividend checks.
Start an emergency fund
Ok, so this one may not seem as fun or as interesting as the others but it’s no less worth your time. A recent survey by Bankrate found that more than a third of Americans are facing serious financial risk. Nearly a quarter (24%) said they had more credit card debt than emergency savings. Another 13% said they had no emergency savings at all.
You may not earn much money on your emergency savings in money market accounts but it will save you big time if you every need it. Quick loans from payday lenders can cost more than 500% on an annual basis and you don’t want to fall into the trap of needing to renew your cash advance loan every two weeks. Fall into the cycle of quick cash debt and you could pay $5,000 in interest just on a recurring $1,000 cash advance.
Donate your tax refund
So this one may not help your tax refund go farther for you but it could help it go farther for someone that really needs it. Let’s face it, a few hundred bucks probably isn’t a huge deal for many of us but that same amount could mean months of food or keeping the heat on for someone else. If you itemize your taxes, you’ll receive a deduction for your charitable contributions next year as well.
Congrats on your tax refund, it feels great getting something back for a change. Have some fun with it and enjoy life a little but put some of your tax refund to work and make it go farther. I’d love to hear any of your ideas on making a tax refund go farther. Please email me or use the comment section below.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.