The average tax return refund in 2020 was $ 2,827, a nice sum of money that most Americans look forward to each year. It might be tempting to use that money for a vacation or a big purchase, especially as the stress of the pandemic has dampened demand for travel.
However, tax refunds are a great tool that can jumpstart our finances in a number of ways. Here are five smart ways to use your 2022 tax refund to improve your financial game.
1. Build an emergency fund
About one in four Americans has no emergency savings. Unexpected expenses are a major cause of people’s debt. If you’re financially prepared, it’s a lot less stressful to deal with life’s unpleasant surprises, whether your dog breaks its paw or your car decides to slow you down.
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Some 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 get you through life’s bumps.
2. Pay off high interest debt
It’s hard to stay on a financial footing, let alone build wealth, if you pay huge interest rates on things like credit cards or payday loans. These loans keep you in debt, earning you tons of interest as you make the minimum payments month after month.
The 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 ASAP, and if you’ve got pesky credit cards lying around, be sure to cut them.
3. Start a secondary activity
Whatever your financial goals, making more money is almost sure to help you reach them. Nearly six in ten Americans have a secondary activity, according to a survey conducted by Dollarsprout. Whether it’s walking a dog or starting an online store, you can make extra money in countless ways, and a few thousand dollars is more than enough to get started in most of them.
The best part is, you don’t have 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 spending an additional $ 500 per month on 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.
Bitcoin price data by YCharts
Each has produced huge returns over the past few years. While no one can predict the future of cryptocurrency, it remains a young asset class that can be part of a diverse investment portfolio. Investors should remain cautious 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 up wealth. The S&P; 500, which tracks the 500 largest US 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 focused on the investment strategy you are comfortable with. Are you looking to maximize your returns and are able to handle 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 sound like free money, but in reality the government has taken too much of it and is only giving you your own money. Instead of spending it frivolously, use it to improve your finances, and it will probably make you a lot happier than a new TV or a long-term weekend.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.