In 2019, the average federal tax refund amount was $2,869, and the Internal Revenue Service (IRS) issued over $320 billion in refunds.
Use your refund wisely — consider the following ideas:
Save for Emergencies. Aim to set aside at least three to six months worth of expenses in a money market fund or bank account. This is your “fall back fund” in the event of unemployment or unanticipated expenses.
Pay Down Debt. The more debt you repay, the less interest you will owe. Paying down a credit card balance that has an 18 percent interest rate is like earning 18 percent on an investment — plus it is a guaranteed return and tax-free.
Start an IRA. A one-time $3,000 tax refund invested in an IRA containing a stock index mutual fund with an average 8 percent return will be worth almost $31,000 in 30 years. A $3,000 tax refund invested every year for 30 years will be worth over $370,000.
Invest in Mutual Funds. Most mutual funds allow investors to open an account with $3,000 or less. Choose a fund with good historical performance, low expenses, and an objective that matches your investment goals.
Improve Your Skills. Use your refund to take courses or attend conferences that will make you a more effective and valuable employee. Economists refer to this as “building your human capital.”
Review Your Tax Withholding. A large refund indicates that your tax withholding is incorrect (over-withholding). Hire an accountant or financial planner to review your finances or use the online IRS Withholding Calculator.