Getting a big tax refund is not uncommon. According to the IRS, the average tax refund in 2016 was around $3,050. And when the federal government hands you several thousand dollars, it's tempting to book that cruise you've been dreaming of, or to pick up a nice new TV.
But wouldn't it make more sense to use that money to earn even more money? Sure, there's a little delayed gratification involved, but if you can turn that $3,000 into $4,000, $5,000 or even more, think of how much more you could buy. Here are some ways to use that big tax refund to get an even bigger payout.
Pay off your credit cards
By the end of 2016, credit card debt in the U.S. had risen to $779 billion, according to the Federal Reserve. The average American household with credit card debt is carrying a balance of $16,748. That's a lot of money on which to be paying (exorbitantly high) interest. Put your tax refund into your credit card balances, and you'll save hundreds, if not thousands, of dollars in fees and interest. And making a big dent in your balances makes it easier for you to get caught up on the rest of your debt.
Start an emergency fund
Once you've broken the back of your credit card debt, the next-highest financial priority is setting up an emergency savings account with enough money to pay for several months' worth of expenses. Emergency funds are a powerful financial resource, because the next time a crisis comes around, you can take money out of the fund instead of running up more credit card charges and getting trapped in the vicious debt cycle once again. Starting an emergency fund is almost like paying off future credit card debt in advance -- interest-free. And a fat tax refund is a great way to jump-start your emergency fund without carving a lot of money out of your day-to-day budget. Given the low interest rates standard bank accounts are paying right now, you might consider putting your emergency savings in an internet bank money market account, where it will earn more interest while remaining easily accessible.
Pump up your retirement savings
Stock investments return an average of around 7% per year over the long term, and investments in a tax-deferred retirement savings account can grow tax-free, making your potential returns even higher. Plus, money you contribute to a traditional IRA usually qualifies for a deduction, saving you on the current year's tax bill and potentially earning you an even bigger refund next year. That's a great double whammy to help your tax refund make even more money for you -- not to mention that it will help you fund a well-heeled retirement.
If you have a 401(k) or other employer-sponsored retirement account, that's the best option, because you can take full advantage of any employer matching. If not, an IRA is also an excellent choice, as it comes with similar tax benefits. Invest $3,050 in a retirement savings account that earns an average of 7% per year, and in 20 years that tax refund will have grown to $11,803. Keep sticking the same tax refund in your retirement accounts every year, and you'll have $145,591 after 20 years. And that doesn't even factor in any other contributions you make.
Invest in yourself
Think about what it would take to get the job you really want, whether that means the next step up the corporate ladder or an entirely new career. Is there a degree or certification you'd need? Or would it just take a training course or two to sharpen your skills? Whatever training or education is required, your tax refund can help you finance it. And if the end result is a promotion or a better job, you'll be amply repaid not only in salary, but in satisfaction.
Finance home improvements
Most homeowners have a long list of home improvements they'd like to undertake, if they could just scrape up the necessary funding. Using your tax refund to get those home improvements done is another two-for-one: You get to enjoy the upgrades to your home and simultaneously increase your house's value. Be aware that the return you get on many home improvements isn't exciting. Still, you can benefit from your improved living situation immediately instead of waiting for some day in the misty future. And once your upgrades are complete, you can kick back, relax, and raise a toast to Uncle Sam.
The Motley Fool has a disclosure policy.