Tax refunds may just provide a much-needed barrier of protection if inflation eats up budgets like waves erode beaches.
According to the latest data, as of March, prices have increased by 6% over the last 12 months. consumer price indexAt the same time, just over half (55%) of filers expect a tax refund for the 2022 tax year, with an average expected refund of $2,205. 2023 Nerdwallet Tax ReportConsumers can take advantage of that windfall, according to financial experts. This is really just a delay in the salary already earned. It helps offset the burden of these high prices.
“Tax refunds will come at just the right time for many consumers this spring,” said Drew Wessell, a certified financial planner at Fiduciary Financial Advisors in Grand Rapids, Michigan.
get rid of high interest debt
and rising interest rates, including credit cards, variable rate debt will be more expensive. That’s why many financial experts put debt repayment at the top of their list of priorities, even though they think of it as a form of investment.
“If you use your tax refund to pay off your credit card debt at 20% interest, you get an immediate 20% tax-free return on your investment. , the mathematics makes this the most impactful action consumers can consume,” Wessell said.
save in a high yield account
Rising interest rates also mean higher yields on savings accounts, so you can save on withdrawals and earn more. “If you already have a high-yield savings account, consider a CD,” says Margherita Cheng, a certified financial planner and founder of Blue Ocean Global Wealth in Gaithersburg, Maryland. CDs, or certificates of deposit, offer high yields in exchange for low liquidity, as they are expected to hold money in one account for over a year.
Wessell recommends saving enough to have an emergency fund set up or increased in case of sudden unexpected expenses or job loss. “Life is full of surprises, and having an emergency fund can keep you from falling into another debt spiral,” he said.
Fund long-term goals
Rising prices are impacting long-term savings goals such as retirement and college, so reimbursements could offer an opportunity to get back on track, Cheng said. “You don’t have to put in a lot of money, but it could be seed her money,” she added, using the initial payout when her son began his career to open her Roth IRA. I noticed that
Similarly, you can handle other delayed financial tasks such as purchasing life insurance. “Reconsider your family situation,” Chen urges, especially if you have young children.
upgrade the house
In many real estate markets, rising home prices and rising interest rates have made it difficult to buy your dream home. Instead, we recommend using reimbursement to improve your current home, says Ryan Greiser, a certified financial planner and founder of finance company Opulus in Doylestown, Pennsylvania. Higher appliances, or improved windows can make a home more energy efficient and increase its value.
“We love the idea that people love the spaces they live in,” said Greiser.
If you have an outdoor space, invest in chicken coops and gardening supplies for harvesting eggs and vegetables. All these things are expensive at the grocery store. Certified Financial Planner Tim Melia, Principal and Financial Planner at Embolden Financial, suggests: Planning in Seattle. If you have neighbors with skills such as carpentry, you can barter with them to save even more.
generate more income
Renovating a room in the house to make a rental unit could generate income that could help offset inflation over the years, he says, offering several short-term lodging options through vacation rental website Airbnb. Melia, who runs it, said: He said the upfront investment could include better furniture and décor.
Similarly, investing in yourself by taking classes for new skills and certifications can increase your income. “It increases your earning potential and allows you to step into a more lucrative career or take the next step in an existing career,” Melia added.
find little ways to heal yourself
Air travel and other big splurges can be prohibitively expensive, but even after other priorities are taken care of, reimbursement makes for more affordable fun, Chen said. She’s obsessed with listening to audiobooks (most recently Prince Harry’s “Spare”). “She was nervous at the gym when she saw the news, so she listens to audiobooks instead,” she said.
Finally, if you’re getting a refund, it means you paid too much tax in 2022. You may be better off adjusting your withholding to receive more tax on each paycheck instead. “If you’re receiving more than $3,000, you’ll probably want to review your tax withholding as it could be $200 to $300 per month.
And that could help offset rising gas, restaurant, or grocery bills throughout the year.
This column was provided to The Associated Press by personal finance website NerdWallet. The content is intended for educational and informational purposes and does not constitute investment advice.