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Five Ways to Take Advantage of Your Tax Refund

tax_refund_image_large.jpgWhile most people don’t necessarily look forward to tax season, it does provide many with a chance to better position themselves financially with the issuing of tax refunds. Officially running from January 29th through April 17th, 155 million individual tax returns are expected to be filed during 2018’s tax season.1 In 2017, the average American received a refund of about $3,000.2 If you are one of the lucky ones receiving a refund this year, it can be tricky to decide just what to do with your newly acquired money.

In early 2018, GOBankingRates surveyed over 5,000 adults across the United States to determine trends in how Americans planned to spend their tax refunds. Of those who indicated that they received a refund, here is what respondents selected as their number one choice of what they planned to do with their money:

  • 43%: Put the money in savings
  • 36%: Pay off debt
  • 10%: Put the money toward a vacation
  • 6%: Splurge on a luxury purchase
  • 5%: Make a major (necessary) purchase

The vast majority of respondents indicated that they would put the money towards savings or paying off debt. However, it’s understandably tempting to want to treat yourself and splurge with any amount of money received outside of your regular paycheck. Why not go out and buy the latest iPhone or book a luxurious vacation with your tax refund? You’ve earned it! You can certainly spend your money however you’d like—yet now is also the perfect opportunity to give a boost to those financial goals that you’ve been working towards.

Instead of leaving your refund money sitting in your checking account waiting to be used, make a plan to use it intentionally. Building off of the options listed above, here are five ways to take advantage of your tax refund:

1. Pay off high-interest debt.

If you have high interest rates on debt ranging from credits cards to loans, there’s a strong argument to be made that one of the best investments you can make with your refund is paying down your debt. A great place to start is with the form of debt containing the highest interest rate, before working your way down from there. For those with credit card debt, carrying a balance on your credit card from month to month can affect your credit score, particularly if your balance if frequently high. If you’re one of the many with student loan debt, putting a large chunk of money towards this could likely alleviate months of minimum payment dues. Whether your refund will allow you to pay off some or all of your debt, it will likely at least relieve some financial stress. If you are juggling multiple forms of debt and aren’t quite sure where to start, your financial advisor can provide helpful insights for developing a sound strategy.

2. Add to your emergency savings fund.

The concept of starting, replenishing or adding to your emergency savings fund likely sounds like a broken record at this point—yet it’s too important to leave off this list. Your emergency savings fund should contain about 3 to 6 months’ worth of monthly expenses. Its primary function is to deliver a sense of security should an unexpected event occur that requires you to need a considerable amount of money right away. For many, accruing 3 to 6 months’ worth of expenses is a task that could likely take several months or longer to complete, especially with other regular expenses in need of attention. Your tax refund is the perfect opportunity to either start, replenish, or add to your emergency savings fund.

3. Put it towards a project or goal.

Prioritizing purchasing a new washer and/or dryer, fixing the furnace, purchasing new tires, and so on can be difficult in the midst of all your other regular expenses. Your tax refund is a great way to give these projects some much needed attention without totally offsetting your budget. Another option is to use it to further progress on one of your other goals—your retirement plan, your children’s college funds, or any other savings goals you’ve previously set, such as saving for a wedding or even an upcoming vacation. Remember, for 2018 the annual contribution limits to your 401(k) are $18,500 for those under 50 and $24,500 for those over 50.3 Your tax refund can be a great way to make some progress on whatever goals you’ve already set in motion.

4. Make a donation to a cause you care about.

Maybe you are passionate about a certain cause or charitable organization but have found it difficult to work regular financial contributions into your budget. Donating all or part of your tax refund to a charitable cause is a worthwhile way to spend your money while also benefiting others. You may feel compelled to give to a cause you’re already close to, such as your church, alma mater, or another local organization. For those looking for some direction, websites such as CharityNavigator.org and GuideStar.org can provide helpful details on charitable organizations, from their location and mission to their overhead expenses and financial transparency. You can also view a charitable organization’s Form 990 on either database. If you wish to itemize your deductions for next year’s tax return, be sure to obtain proper documentation of your donation.

5. Use it to jump start another goal.

Often the hardest part of achieving a goal is figuring out just where to start. Maybe you’ve had dreams of going back to school, starting your own business, purchasing your first home, or something else. Use your refund to jump start whatever goal you have in mind. No matter the amount, it can motivate you to devise a plan to keep the momentum going. Your financial advisor can be helpful in developing a strategy to work towards achieving your new goal while balancing your other financial priorities.

Whatever you choose to do with your refund, having a plan in place before the money hits your bank account can be valuable, no matter how much your refund consists of.

Interested in discussing this topic further with a financial advisor? With offices in 23 states, there is likely a North Star financial advisor near you. Contact an advisor here.

Written by North Star Resource Group.

1IRS. “2018 Tax Filing Season Begins Jan. 29, Tax Returns Due April 17; Help Available for Taxpayers.” IRS News Releases. Last modified January 5, 2018. https://www.irs.gov/newsroom/2018-tax-filing-season-begins-jan-29-tax-returns-due-april-17-help-available-for-taxpayers.

2IRS. “Filing Season Statistics for Week Ending December 29, 2017.” IRS News Releases. Last modified January 12, 2018. https://www.irs.gov/newsroom/filing-season-statistics-for-week-ending-december-29-2017.

3Huddleston, Cameron. “Here’s the No. 1 Thing Americans Do With Their Tax Refund.” GOBankingRates. Last modified February 22, 2018. https://www.gobankingrates.com/taxes/what-americans-do-with-tax-refund/.

3IRS. "IRS Announces 2018 Pension Plan Limitations; 401(k) Contribution Limit Increases to $18,500 for 2018." IRS Newswire. Last modified October 25, 2017.  https://www.irs.gov/newsroom/irs-announces-2018-pension-plan-limitations-401k-contribution-limit-increases-to-18500-for-2018.

Financial Advisors do not provide specific tax or legal advice.  This information should not be considered as specific tax or legal advice. You should consult your tax or legal advisor regarding your own specific tax or legal situation.

North Star Consultants, Inc. - Insurance Products and Services. CRI Securities, LLC – Securities and Investments. Securian Financial Services, Inc. - Variable Products and Securities. North Star Resource Group offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc. CRI Securities, LLC is affiliated with Securian Financial Services, Inc. Members FINRA/SIPC. North Star Resource Group is not affiliated with Securian Financial Services, Inc. North Star Resource Group is independently owned and operated. North Star Resource Group| 2701 University Ave SE | Minneapolis, MN 55414. 2046009 / DOFU 03-2018

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