According to data from the Internal Revenue Service (IRS), the average tax return — at least so far this year — is $2,873. That’s having processed more than 70 million refunds in 2021. And that’s more than $100 higher than the average 2020 tax refund, which came in at around $2,750.
And while it can be tempting for Americans to spend this money on something to treat or reward themselves for managing through a very difficult calendar year complete with lockdowns, restrictions and other COVID-19 guidelines, that’s not necessarily the most responsible thing to do with your refund. We’re certainly not saying that you shouldn’t have some fun with a portion of it, especially as the American economy takes off and there’s less of a worry over COVID-related layoffs, but it’s always best to have a plan in place and allocate some of these funds responsibly.
So what should you do with part — or all — of your refund? Here’s what the experts advise:
Boost Your Emergency Fund
It’s estimated that roughly half of all Americans wouldn’t have enough money in the bank to pay for an unexpected expense of less than $1,000. That’s a big problem, as most financial experts advise having a rainy day fund that’s solvent enough to cover at least three months’ worth of living expenses. So if you don’t have an emergency fund and are sitting on a nice tax refund, be sure to allocate a portion of it toward this. Then, be sure to make a plan moving forward where you continue to allocate money each month toward this cause.
Pay Down High-Interest Debt
The higher the interest rate on any loans or credit card debt, the faster you want to pay it down. Generally speaking, you should have a plan for paying down any loan or account with an interest rate greater than 5 percent. But you should make it a priority to start with the account with the highest rate. For instance, pay off that credit card with a 15 percent interest rate before you tackle the one with the 6 percent rate.
Allocate Some Funds for Retirement
Yeah, we know that planning for retirement might not be the most fun thing to do with any tax return money that’s coming your way, but investing a small portion of it in your IRA can go a long way over time. As soon as you put money into the market, it goes to work for you — earning interest on the amount that is invested. Seeing how the average IRA returns between 7 and 10 percent on an annual basis, the more money you have in it, the better it’s going to be for you in the long run.
