3 timely ways to spend your tax refund this year
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For many American families, the largest cash infusion they get all year is their tax refund.
The average check cut by the IRS was more than $2,800 in 2021, although refunds might be smaller this year for several reasons.
How you should spend the money largely depends on your circumstances, financial advisors say.
“Any time I get a tax refund, I first assess what my short-term cash needs are,” said Douglas Boneparth, certified financial planner and president of Bone Fide Wealth in New York.
Still, there are a few uses of the money that could make extra sense in 2022.
1. Prepare for student loan payments to restart
By the time student loan payments restart in May, most borrowers will have gone more than two years without paying those bills, thanks to pandemic-era relief delivered by the government.
The change might be rocky for some.
As a result, higher-education expert Mark Kantrowitz recommends borrowers salt away their refunds “to provide a cushion for the restart of repayment, so that they can ease into it instead of having a sudden change in their budget.”
Because the accumulation of interest on most federal student loans was suspended during the government’s payment pause, your monthly bill should be around the same as it was before the pandemic. The average student loan bill was about $400 then.
That means if your refund was $2,800, you’d have the payment covered for seven months before you’d have to rearrange your budget.
2. Pay down credit card debt
Credit card debt is rising at its fastest rate in decades, a recent report by the Federal Reserve Bank of New York found. The Central Bank is projected to raise rates this year, which means interest charges will go up, too.
“Using your tax refund to pay down your credit card debt is an excellent choice, since credit card rates are very high and likely headed higher,” said Ted Rossman, CreditCard.com analyst.
The average interest rate on credit cards currently tops 16%, and the typical balance is more than $5,200. It would take you 16 years to pay off that debt if you made only the minimum payments each month. You’ll also have shelled out more than $6,200 in interest, according to Rossman.
But if you directed a $2,800 tax refund to that balance, you’d reduce your repayment timeline to 10 years, and your interest charges would fall to $2,400.
3. Finally get into cryptocurrency? Maybe …
Amid all the hype, perhaps you’re tempted to use your refund to buy some cryptocurrencies.
That may not be a bad idea.
But first, you want to make sure you’ve checked a few important boxes. Addressing credit card debt and making sure you’re on track with your retirement savings are more pressing goals than investing in a new volatile asset class, experts say.
You also want enough in your savings to help you cover an unexpected expense or to get through a job loss.
“I tell people to keep enough cash so they can sleep well at night,” said Allan Roth, CFP and founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.
If those other priorities have been addressed, you’ll still want to review your time horizon, asset allocation and risk tolerance before investing in cryptocurrencies, according to Ivory Johnson, CFP and founder of Delancey Wealth Management in Washington, D.C.
Many advisors recommend people put no more than 5% of their money in the digital coins. If you’ve already decided on a share to invest in, don’t let your refund derail your plan.
“If they had a target of 3% in crypto before the refund, they should have 3% after the refund,” Johnson said.
Of course, if you can afford to invest the money, there are many other options. The most reliable is probably a broad-based index fund, advisors say.
A $2,800 investment in the S&P 500 Index five years ago would be worth around $6,100 today, according to Morningstar Direct.