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What Should You Do With Your Tax Refund?

Christy Bieber, The Motley Fool

In last year's tax filing season, the average tax refund was $2,763. More than 97 million refunds were sent out by the IRS, with around 71% of all filed tax returns leading to a refund. 

If you're one of the millions who receives a tax refund, this influx of cash provides a great opportunity to improve your financial situation. Check out these four suggestions to find the right use for the hard-earned money the IRS is sending back to you. 

IRS 1040 form and calculator

Image source: Getty Images.

1. Pay down debt

If you carry a balance on your credit card, chances are your balance is a big one. The average household with credit card debt owes $15,983. Owing money means paying interest, which eats into your available cash. The good news is, you could move a lot closer to being debt-free if you used your tax refund to make a big lump-sum payment.

If you owe $15,983 on a credit card with a 16% interest rate and make minimum payments of $375, it'd take you 64 months to pay off your balance. But if you made a one-time extra payment of $2,763, you'd repay the debt in 48 months instead. You'd also pay just $4,757 in total interest instead of $7,799, saving more than $3,000. 

If you don't have credit card debt or other high-interest debt, you could pay extra toward a mortgage, car loans, or student loans. Any extra payment will reduce interest, so your loan will cost you less in the long term. 

2. Start an emergency fund

If you don't already have an emergency fund, your tax refund is a great initial investment for this essential account. Ideally, you should have around three to six months of living expenses saved up, but even a $2,763 emergency fund could be a lifesaver when something inevitably goes wrong. 

Three in five Americans experienced a major unexpected expense in the prior year, according to a 2017 Bankrate study, and close to 60% of Americans didn't have the savings to cover surprise expenditures. If you put your tax refund into an emergency fund, you won't have to turn to a credit card or borrow from family next time a problem arises. 

3. Invest for retirement 

Chances are good you probably didn't max out your tax-advantaged retirement accounts last year. In fact, according to Vanguard, just 18% of 401(k) participants contributed 10% or more of their income in 2016 and just 10% contributed the maximum allowed for the year. 

Contributing to a 401(k) or an IRA is a great way to both get a tax break and set yourself up for a more secure future. If you invested an average $2,763 refund this year in a tax-advantaged retirement account earning 8% returns, you'd have almost $30,000 in 30 years. If you invested your tax refund every year over the next 30 years, you'd have more than $313,000 -- assuming you received the exact same $2,763 refund from now until retirement.  

Not only could investing your tax refund give you a retirement account balance far above average, but you could also reduce next year's tax bill. A $2,763 contribution to a traditional 401(k) or IRA would save you $607 off your 2018 taxes if you're in the 22% tax bracket.

4. Tackle your deferred maintenance

Fixing that leaky faucet, upgrading your old fridge to an energy-efficient model, and getting air filters changed in your car -- all these little tasks add up to a lot of money. During the year, you may not have the extra cash to pay for the fixes you need to make. Unfortunately, by deferring repairs or forgoing energy-efficient improvements, you could be hurting the value of your home or car, or spending more than you need to on utilities.

A big influx of cash is a great time to complete all the updates you've been putting off. Call in a repair person to tackle the tasks around your home, or take your car to a trusted mechanic for a tune-up and careful once-over.

By making fixes and repairs now when you have the money, you not only protect your investment in your home or car -- you also reduce the likelihood of unexpected repairs cropping up that you have to pay for later when you may not have cash to spare.

Put your tax refund to work for you

When you get a tax refund, the IRS is sending you back money you worked hard to earn. Don't blow the cash on something you won't remember by the time next year's tax season comes around. Take the money and turn it into an investment in your financial success -- you won't regret it. 

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