Rosalind Evans
As of March 24, the IRS had processed over 59 million tax refunds, with an average amount of $2,903. While this is 11% less than the prior year’s average of $3,263, it remains a significant sum for most taxpayers. Wisely utilized, such a refund could catalyze a savings strategy or drastically cut interest payments on debt. But it’s essential to ensure the money isn’t carelessly squandered or simply used for routine expenses.
If you’re pondering how to optimize the impact of your tax refund, here are top recommendations for 2023:
1. Eradicate High-Interest Debt:
With the surge in interest rates in 2022 and 2023, liabilities like credit card balances have become more burdensome. Recent data from the Fed highlighted an average credit card interest rate of 20.40%, up from 16.45% in 2021 and 16.28% in 2020. Allocating your tax refund to clear or reduce such high-interest debts can significantly ease your financial burden. And if clearing the entire debt isn’t feasible, consider transferring the balance to a card offering a 0% introductory interest rate, such as the Citi® Diamond Preferred® Card.
2. Strengthen Your Emergency Fund:
Higher interest rates aren’t just bad news. They can be beneficial for savers. Numerous high-yield savings accounts and CDs now provide attractive returns with minimal fees. For instance, Marcus by Goldman Sachs is offering a 10-month CD with a 5.05% APY for deposits starting at $500.
3. Boost Your Retirement Savings:
If you’re content with your short-term financial health but want to bolster your retirement savings, consider increasing your contributions to retirement accounts. For 2023, most individuals can deposit up to $6,500 across all IRA accounts, with those 50 and above eligible for an extra $1,000 contribution.
4. Kickstart a College Fund:
Given the uncertainty around student loan forgiveness plans, it’s wise to start setting aside funds for higher education. 529 college savings plans not only offer a platform to grow your investment but also come with state-specific tax benefits.
5. Opt for Life Insurance:
Life insurance is an often procrastinated decision but it can be surprisingly affordable. Companies like Bestow offer term life insurance policies without mandatory medical exams, with premiums starting as low as $11 per month.
6. Invest in Personal Growth:
This could be anything from signing up for a gym membership, updating your wardrobe, or pursuing a certificate course to enhance your professional skills. For those considering formal education, one year of community college tuition for the 2022-2023 academic year averages around $3,860, aligning closely with the typical tax refund.
7. Splurge Wisely:
While it’s crucial to be financially prudent, it’s equally essential to reward oneself. Use a fraction of your tax refund on something that brings joy, be it a vacation, new furniture, or tech gadgets. As the saying goes, “balance is key,” so while being financially responsible, don’t forget to indulge a little.
In an era where financial uncertainties loom large, every dollar counts. While a tax refund may feel like a bonus, it’s essential to remember that it’s a return of your hard-earned money. By striking a balance between responsible financial decisions and personal indulgence, you can ensure that your 2023 tax refund is not just spent, but invested in creating a more secure and fulfilling future. Here’s to smart decisions, future growth, and a touch of well-deserved luxury!
