5 Things To Do With Your Windfall

Getting a tax refund always feels like getting a $100 bill on an old winter coat. But this year, that coat carries a lot more money.

According to the latest data from the IRS, the average tax refund is sitting at $3,804. That’s up 10.2% — or about $351 — from the same time last year.

Why do you suddenly jump? You can thank the new tax laws passed last year, which expanded the standard deduction and eliminated taxes on tips and overtime.

Now, I can teach you that refunding means that you have given the government a large loan with no interest. And yes, you must prepare your W-4 withholding. But right now, if you have a lot of money sitting in your checking account, you need a plan.

Here’s how to make that rain work for you, so you don’t look back in July and wonder where it all went.

5 things you can do with your windfall

1. Pay off your high-interest debt: Let’s be honest. If you carry credit card debt with an interest rate of 24%, you are losing money every single day. Taking your refund and clearing your credit card balance is a snap, with a guaranteed 24% return on your money.

You can’t find a legitimate investment anywhere in the world that guarantees those kinds of numbers. Pay off debt first. (See “The Best and Worst Ways to Destroy Credit.”)

2. Top up your emergency savings: Life is incredibly expensive right now, and unexpected expenses aren’t a matter of if, but when. Your car will need new brakes, or your water heater will decide to quit on Tuesday.

If you don’t have three to six months of living expenses set aside in a high-yield savings account, use your refund to get there. (See “25 Tips for Saving Money When Your Budget is Stretched.”)

3. Start with retirement: Time is the most valuable asset you have when it comes to investing. If your debt is taken care of and your savings account is healthy, consider rolling that tax refund directly into a Roth IRA or your workplace 401(k).

If you invest $3,800 today and never add another dime, it can grow to more than $26,000 over 25 years, assuming an average annual return of 8%. That’s how wealth is built. (See “8 Ways to Grow Your Traditional or Roth IRA.”)

4. Handle delayed home or car maintenance: Ignoring a funny noise in your car engine or a slow leak under the sink will always cost you more in the long run. Using your tax refund to pay for preventive maintenance is the most effective way to protect your property. Repair the roof now so you don’t pay for major water damage later.

5. Spend a little on yourself: I’m a financial writer, but I’m also a realist. If you try to be 100% disciplined all the time, you will eventually burn out. Take 10% of your returns and do whatever you want with them. Go out for a nice dinner, buy those concert tickets, or upgrade your coffee machine.

Take care of your financial future with a lump sum, but give yourself permission to enjoy the present.

The bottom line is that a large tax refund gives you a rare opportunity to get ahead. Choose wisely before the money evaporates and use everyday money.