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Contrary to popular opinion, a tax refund is not just money that you happen to come by out of the blue. This is the extra dollars that you have been paying throughout the tax year through your employer to the IRS which the latter is paying you back now. Often, the sum received by a taxpayer is considerable. It can cover a lot of expenses and provide some relief (or at least the thought of it). However, there are 3 uses of the tax refund that do not make any financial sense, and 1 that is probably the smartest investment. Find out what they are here.
1. Pay off your debt
Paying off your consumer debt feels good and many use the tax refund money to do exactly that. But what they do not realize is that the foreclosure charges often exceed the amount of interest you owe on your current debt. Hence, avoid going by the trend. Read the fine print on the foreclosure document and match the sum with the refund you received from the IRS. An imbalance immediately makes the idea invalid as you will make an overall loss.
2. Adding it to your emergency cash at home
Chances are that you already have an emergency fund stashed up somewhere in your home. And the tax refund was the money that you were not using anyway. Adding cash to more cash makes the entire sum more useless. Any expert will tell you that cash depreciates over time due to inflation. Going by the current US rates, your $100 bill will be worth $98 after one year due to 2% annual inflation. So, you need to invest the extra cash into an asset. Something that will serve you now instead of sitting at a corner and losing value.
3. Put it in the bank
Yes, you can something on your money by putting your tax refund in the bank but the scenario is not pretty there as well. Currently, US banks give an interest of 0.05% on savings account which is way less than the inflation rate. Overall, you again lose money. No investment plan presently provides a better return except the extremely risky stock market. Saving your tax refund in the bank is also out.
So, what should you do?
Use the tax refund money as a down payment to buy a used car. Finance the rest and take ownership of a vehicle. One, a used car will keep you safe during these trying times of the coronavirus pandemic. Two, you can take advantage of the rising prices of used cars later to resale at a high value after having used the vehicle. And third, you can use the car to draw out a loan in case an emergency hits you and pay this out without losing any asset to any external factor. Given the economics of the United States, spending your tax refund is the best option. Why not be smart and spend it on a valuable asset? A used car will serve you and your family and help improve your overall standard of living.