American taxpayers received a staggering $328 billion from the IRS last year in the form of annual tax refunds. At first glance this appears to be a huge number, however when you break it down by individual, the average refund in 2010 was approximately $3,000. During a time when the economy is sluggish, taxpayers who qualify for a refund look forward to this time of year when a lump sum payment is issued by the government. The average $3,000 refund was up 5% from 2009 thanks to various tax initiatives and credits. While many people are anxiously awaiting this year’s return, it is important to think ahead as to where that money will go. Many are tempted to splurge and buy something they wouldn’t normally buy throughout the year, while others will apply this money toward bills and other liabilitys. Here we look at a few ways you can spend your tax refund in 2011.
Pay down liability- One of the quickest and easiest ways to pay down liability is applying a lump sum payment toward your account. This may not be the most exciting way to spend your tax refund, however it will ease your financial burden moving forward.
Set up an emergency fund- If the average income tax return is $3,000, this is a significant chunk of change that can be stashed away in an emergency fund. Many Americans simply do not have the extra money left over out of their check after paying their bills to build up an adequate emergency fund. Having this “extra” money set aside can make a huge difference if you find yourself out of work or faced with unexpected expenses.
Boost your retirement contributions- Maxing out retirement savings is the best way to boost their earning potential. If you are not contributing the maximum amount of money allowed for your retirement plan, you are missing out on the opportunity to save more money toward your retirement.
Invest in education- Parents, students and everyone else can benefit from additional education. Whether you are paying for college now or want to take a class to further your career, investing in your education will always pay off down the road
Invest in your health- Health care is expensive. If you do not have insurance, you can apply tax return funds toward an annual premium. You can also use this money to fund other health savings plans which reduce your expenses and save on out-of-pocket expenses throughout the year.
Treat yourself- This is probably the only time of year when you will be receiving a “windfall” of sorts, therefore it is okay to allocate some of this money to pay for something you have had your eye on throughout the year.
These are just a few of the ways in which you can spend your income tax refund money. It is also important to remind taxpayers that the money you receive from Uncle Sam is not a bonus. This is your own money which you simply overpaid the government throughout the year. With this in mind, many taxpayers would benefit by adjusting their withholdings and investing that extra money throughout the year and earning interest on it.