The average tax refund for 2014 is just over $3,000. Though your first order of business should be to reduce that amount to $0 next year (after all, a tax refund is really an interest-free loan you've made to the government; LearnVest explains why you don't want a big tax refund, here
), there are some simple ways everyone can grow this year's refund into a far more valuable sum in the future. Here's how.
1. Reduce/eliminate credit card debt.
You wouldn't pay someone as much as 11% to borrow money you already have on hand, but that's exactly what you're doing if you carry a balance on even a lower interest credit card and don't put your tax refund towards paying down your credit card debt. (Remember that even 0% interest rate credit cards only offer those terms temporarily, and carrying balances that push your debt utilization ratio
-- how much total debt you have versus how much credit is available -- can actually lower your credit score and limit your access to lower interest loans and lines of credit.)
2. Be your own insurance policy.
If you don't have at least six months' worth of your income saved in an emergency fund, put your tax refund in an interest-bearing account that you know you won't touch unless an emergency strikes. Though you won't see much "growth" in an interest-bearing checking or savings account, having money at the ready ensures that you won't be forced to use your credit cards or take out a loan of some sort in the event that you lose your job or have some kind of medical or otherwise unforeseen financial emergency.
3. Don't return it to the tax man.
According to a Bankrate survey
, only 18% of working Americans are saving more for retirement now than they were one year ago. Though retirement savings doesn't offer the immediate gratification of splurging on that new wearable or weekend getaway, it's a simple way to turn a little money into a lot more. "Investing your tax refund within a retirement account provides the dual benefits of investment growth and tax savings," reminds Melinda Kibler, certified financial planner with Palisades Hudson Financial Group. (Contribution limits change from year to year, so be sure to confirm the most recent tax laws based on your income.)
If you want to invest your refund somewhere but you've maxed out your retirement-funding options, aim for limited tax exposure. "If you have an existing investment portfolio, use it to add to a position you need reallocated," says Bradley R. Roth, CFP, and managing partner at Kattan Ferretti Financial LP. "New investors could buy a single position in a diversified ETF or balanced mutual fund to avoid unnecessary trading costs of acquiring multiple positions with a small tax refund."
4. Get more from one of your biggest investments.
Putting your tax refund into boosting your home's curb appeal might pay off too, according to Remodel Magazine's 2014 Cost vs. Value Report
. If you're willing to spend about $10,000 on a new wooden deck, you'll recoup 87% of the cost. Swapping out your wooden front door for one made of steel will cost about $2,000 but should result in a 96% return on your investment. For about the same price, a new garage door should deliver an 83% ROI.
5. Invest in your child's future.
If you have a child who will attend any type of post-high school education program, including college, technical, or trade school, investing your tax refund into a 529 Savings Plan helps you prepare for those future expenses and can potentially reduce your state-tax burden. Aside from the fact that 529 earnings grow tax-free (and remain untaxed upon withdrawal provided you use them to pay for qualified education-related expenses), 34 states allow plan investors to write off the contributions up to various limits, based on filing status and income. (Check out this chart
by Savingforcollege.com; it breaks down which state plans offer tax features.)
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