The average 2020 tax return refund was $2,827, a nice chunk of money that most Americans look forward to each year. It might be tempting to use this money for a vacation or some big purchase, especially since the stress of the pandemic has pent up demand for travel.
However, tax refunds are an excellent tool that can jump-start our finances in several ways. Here are five smart ways to use your tax refund in 2022 to level up your financial game.
1. Build an emergency fund
Roughly one in four Americans have no emergency savings whatsoever. Unexpected expenses are a significant cause of people falling into debt. If you're financially prepared, it's much less stressful facing life's unpleasant surprises, whether your dog breaks its leg or your car decides to stall out on you.
Image source: Getty Images
Some conventional wisdom calls for an emergency fund to cover three to six months of living expenses. Still, if you're starting from scratch, nearly $3,000 is a good safety net that should help you navigate life's bumps.
2. Pay down high-interest debt
It's hard to stay on your financial footing, let alone build wealth, if you're paying massive interest rates on things like credit cards or payday loans. These loans keep you in debt, making tons of interest money off you as you make the minimum payments month after month.
Credit card companies don't even try to hide it; look at any credit card statement and find the little box that explains how making minimum payments means it will take you 10 to 12 years to pay off your balance! Eliminate high-interest debt as rapidly as possible, and if you have pesky credit cards lying around, make sure you cut them up.
3. Start a side hustle
No matter your financial goals, making more money is almost sure to help you accomplish them. According to a survey conducted by Dollarsprout, nearly six in 10 Americans have a side hustle. Whether it's dog walking or starting an online store, you can earn extra money in countless ways, and a few grand is more than enough to get going in most of them.
The best part is that you don't need to make a ton of money to make a massive difference in your finances! An extra $500 per month dedicated to a specific goal can change your life. Imagine putting an additional $500 per month toward your debt. Or invest it; $500 per month invested at a 10% annual return will grow to more than $100,000 in 10 years.
4. Buy cryptocurrency
Cryptocurrency remains a mystery to many people, but it's proven to be an effective wealth-building tool. Thousands of coins trade on exchanges, but mainstream cryptos like Bitcoin and Ethereum have become household names, much like blue chip stocks.
Bitcoin Price data by YCharts
Each has produced tremendous returns over the past several years. While nobody can predict the future of cryptocurrency, it remains a young asset class that can be a part of a diversified investment portfolio. Investors should stay cautious around "meme" cryptos like Dogecoin.
5. Invest in the stock market
The stock market remains one of the oldest and most reliable means of building wealth. The S&P 500, which tracks the 500 largest companies in America, has returned roughly 10% on average each year since the 1920s. Various funds follow the S&P 500, like the Vanguard S&P 500 ETF, which you can invest in.
You can also build a portfolio of individual stocks focused on whatever investment strategy you are comfortable with. Looking to maximize your returns and able to stomach some volatility? Growth stocks can produce life-changing returns. Want a stream of passive income that can pay your bills? Dividend stocks are the way to go.
Make better use of your tax refund
A tax refund can feel like free money, but in reality, the government took too much and is just returning your own money to you. Instead of spending it frivolously, take the opportunity to better your finances, and it will probably make you a lot happier than a new TV or weekend trip in the long run.
