The average 2020 tax return refund was $2,827, a nice amount of money that most Americans look forward to every year. It might be tempting to use that money for a vacation or a big purchase, especially as pandemic stress has pent up travel demand.
However, tax refunds are a great tool that can jump-start our finances in several ways. Here are five smart ways to use your 2022 tax refund to up your financial game.
1. Build an emergency fund
About one in four Americans have no emergency savings. Unforeseen expenses are a major cause of debt. If you’re prepared financially, it’s much less stressful to deal with life’s nasty surprises, whether your dog breaks its leg or your car decides to trap you.
Some common misconceptions call for an emergency fund to cover three to six months of living expenses. Still, if you’re starting from scratch, almost $3,000 is a good safety net that should help you through life’s hardships.
2. Pay off high-interest debt
It’s hard to stay on your financial footing, let alone build wealth, if you’re paying huge interest rates on things like credit cards or payday loans. These loans keep you in debt, earning you tons of interest when you make the minimum payments month after month.
Credit card companies don’t even try to hide it; look at any credit card statement and find the little box that explains how making minimum payments means it will take you 10-12 years to pay off your balance! Get rid of high-interest debt as quickly as possible, and if you have annoying credit cards lying around, be sure to cut them up.
3. Start a side business
Whatever your financial goals, earning more money is almost certain to help you achieve them. According to a survey conducted by Dollarsprout, nearly six out of 10 Americans have a side job. From walking a dog to starting an online store, there are many ways you can earn extra money, and a few thousand dollars is more than enough to get most of them started.
The best part is that you don’t need to make a lot of money to make a huge difference in your finances! An extra $500 per month dedicated to a specific goal can change your life. Imagine putting in an extra $500 a month to pay off your debt. Or invest it; $500 per month invested at a 10% annual return will grow to over $100,000 in 10 years.
4. Buy cryptocurrency
Cryptocurrency remains a mystery to many people, but it has proven to be an effective tool for building wealth. Thousands of coins are traded on exchanges, but mainstream cryptos like Bitcoin and Ethereum have become household names, as have blue chip stocks.
Each has produced huge returns over the past few years. Although no one can predict the future of cryptocurrency, it remains a young asset class that can be part of a diversified investment portfolio. Investors should be careful with “meme” cryptos like Dogecoin.
5. Invest in the stock market
The stock market remains one of the oldest and most reliable means of building wealth. The S&P 500, which tracks the 500 largest U.S. companies, has returned about 10% on average each year since the 1920s. Various funds track the S&P 500, such as the Vanguard S&P 500 ETF, in which you can invest.
You can also build a portfolio of individual stocks based on the investment strategy you are comfortable with. Are you looking to maximize your returns and are able to withstand some volatility? Growth stocks can produce life-changing returns. Want a passive income stream that can pay your bills? Dividend stocks are the way to go.
Make better use of your tax refund
A tax refund may seem like free money, but in reality the government has taken too much of it and is just giving you your own money back. Instead of spending it lightly, take advantage of it to improve your finances, and it’ll probably make you a lot happier than a new TV trip or a long-term weekend getaway.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.