Pay off high interest debt
Regardless of how much money you’re getting back, reducing and eliminating credit card debt is your top priority. Why? Certified financial planner and founder of She & Money Miranda Reiter explains that with the average interest rate on fixed and variable cards hovering around 14 percent, the amount you stand to save by paying down debt easily beats any amount you’d earn on an investment in a given year and the return on your investment is guaranteed. Start with the highest interest debt until your balances are resolved. (Remember that student loans deserve their rightful spot on your debt pay down “to do” list as well.)
Create a stable emergency fund
Once you resolve debt, your next priority is to establish an emergency savings fund that equates to at least three months worth of your income, but ideally, at least six to nine months worth. Though online banks tend to offer the most competitive saving rates (just at or below 1 percent), this strategy isn’t about growing your money so much as it is a “hedge” against life’s uncertainties, like job loss, car or home repairs, or medical expenses.
Invest in your medium-term goals
What are your plans for the next three to five years of your life? Do you intend to move to a new city, buy a home or remodel, have a child, purchase a new car, or start a business? Though deposit interest rates are paltry, there is inherent and financial value to having access to your money when you need it. Remember that anything that will cause you to borrow money at an interest rate above 0 percent will cost you more than it’s worth. The more you can put forth out-of-pocket, the less you pay unnecessarily. Once you’ve resolved debts and ensured your savings reserves are sufficient, you can get a little more creative in growing your refund.
Accelerate your mortgage payments
If you own a home, making additional payments to your mortgage is an easy way to grow a tax refund of any amount. “Accelerating a mortgage has a payoff that you can calculate based on the interest rate and term of the loan. (Although, technically you are either prepaying future interest or, if you have had the mortgage long enough, cutting into the principal),” says Patrick Morris, CEO of HAGIN Investment Management. “Even $1,500 dollars that you can prepay over the life of a 20-year, 3.85 percent mortgage is about $3,200. You can ‘make’ about $1,700 — simply by making extra payments,” explains Morris.
Pump up your retirement
If you have a 401(k) plan offered through your employer, certified public accountant Jordan Niefeld of accounting firm Gerstle, Rosen & Goldenberg says you can grow your tax refund (again, of any amount) by increasing the value of your 401(k). Though you cannot make a direct contribution to your 401(k), withholdings to the plan can be increased through your employer’s 401(k) administrator. If you’re getting a $1,000 refund, for example, increase the amount you want withheld for 401(k) contributions by that amount in the coming year. Deposit the actual refund into your bank account to make up for the new investment.
Invest for long-term growth
If you’re willing to part with your money for the longer-term but not until retirement, and you have some tolerance for risk, certified financial planner Melinda Kibler of Palisades Hudson Financial Group advises mutual funds or exchange-traded funds with low fees. These provide exposure to a large “basket” of stocks. “If you’re investing $5,000 or less, select a single fund that focuses on U.S. large-cap stocks, or one that provides global exposure,” says Kibler. If you can invest more than $5,000, purchase a few funds with different areas of focus to reduce risk and increase your opportunity to grow your money. (For example, Kibler says a person with a $10,000 refund might put $4,000 into a U.S. large-cap fund, $2,500 to a U.S. small-cap fund, and $3,500 to an international fund).