The average tax refund is $3,028 in America according to the IRS for 2019. This amount comes out to $252 a month.
With basic savings interest rates around 2.4%, thanks to aggressive rate hikes by the Fed since end of 2015, your opportunity cost of not having the $3,028 through the year is about $73. Not a big deal.
Since most Americans are poor savers, getting a tax refund is generally a good thing. Just don't blow it all on stupid stuff!
Your goal should be to not only max out all your 401(k), but to also then save another 20%+ in your after-tax investment accounts to build passive income.
Smart Things To Do With Your Tax Refund
Here are some smart moves to make with your tax refund.
* Sock it away. Put your $3,000 into a savings account at another bank so that you cannot access it easily. Don't go blowing your $3,000 on anything unnecessary, unless you've already maxed out your 401K and saved more than 20% of your income. The best choice is to open up an online savings account so it's slightly harder to touch. CIT Bank has a 2.45% money market account which is one of the best rates I've seen.
* Pay off credit card and auto loans. If you have revolving credit card debt that costs much more than 10%, you really have a spending problem. You do not deserve the things that you are buying because you simply don't earn enough. It is stupid not to pay off your credit card at the end of each month and take advantage of a free 30 day grace period.
Furthermore, if you have a car payment that has an interest rate of much more than 5%, and whose value is more than 10% of your gross annual income, you are also wasting your money. Seriously, these two debts alone are hurting your freedom now, and in the future. Get rid of them and follow the 1/10th rule of car buying for goodness sake!
* Be charitable. If you've already put on your oxygen max, use the money to help someone else put on their own. There's nothing better than helping a friend or loved one in need. Theoretically, we can “over save” to the point where we are severely crimping our lifestyles and generating a bunch of angst in the process. It's much better to financially help someone while living than after death.
See: Three Things My Estate Planning Attorney Told Me Everyone Should Do
* Invest in yourself. This is my most favorite option because the returns on investing in your education, communication skills, language skills and so forth are multi-baggers! It always seems a little foolish to pay $1,000 for a presentation class until you confidently get on stage and wow your listeners to act. Learning another language is priceless if you are dealing with that particular region for business. I firmly don't believe one can get enough education.
* Invest in your business. If you've got a small business, don't be afraid to spend some CAPEX to provide a better experience for your customers. Obviously weigh the amount of money you will spend by your current revenue, balance sheet, margins, and payback period. I view a small business like one's child. Nourish it and watch it grow.
Before you invest in your business, you must start a business. Here is my step-by-step guide for how to start your own website like this one in 30 minutes.
Invest Your Tax Refund Wisely
Getting a reasonable sized tax refund is fine. It feels like a bonus. So long as you invest it wisely, you're doing yourself a financial favor.Please don't blow your tax refund on wasteful things.
If you're getting a tax refund larger than 10% of your gross salary, it's time to make some adjustments. With interest rates much higher today than in the past, the opportunity cost is also much higher.
Finally, I encourage everyone to track their finances diligently. In the past, we'd use an excel spread sheet. Now, there's Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances.
In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing.
I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.