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The 3 Smartest Ways to Use Your Tax Refund

By Christy Bieber - Mar 25, 2020 at 7:45AM

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How you can improve your finances with the money the IRS sends you.

The IRS has extended the tax filing deadline until July 15, which means you have more time to file your return. If you're getting a refund, though, you may not want to wait, since you can use that money to help you weather the COVID-19 coronavirus crisis.

Around three-quarters of all Americans get money back from the IRS, and the average refund in 2019 was a whopping $2,869. If you're one of the many who get a refund, there are three smart options for using your money during these uncertain times.

Man looking at financial papers while sitting in front of laptop.

Image source: Getty Images.

1. Save it

If you don't have a hefty emergency fund, now is a very good time to build one due to economic uncertainty resulting from the response to COVID-19.

While most experts traditionally suggest saving enough to cover living expenses for three to six months, right now you probably want to amass an emergency fund to cover you for around six months to a year. Saving your tax refund can help you start or bulk up your fund. 

If you've already experienced an income cut, and you don't have enough emergency savings, putting your tax refund in the bank is definitely a smart move. Unless you have an immediate need, that could make a huge financial difference.

2. Invest it

If you already have enough saved for emergencies, investing is one of the best things to do.

It may seem odd to see a recommendation to invest at a time when the market is very volatile. But the reality is, many good stocks are on sale at reduced prices right now because of the crisis, even though the companies themselves are fundamentally sound. Investing when the market hits a downturn could enable you to buy companies at a bargain price that will stand the test of time. 

If you invest now, be aware that you may lose money in the short term because it's really difficult to predict when the market will hit bottom. But if you buy a diversified portfolio of index funds or companies you've carefully researched and are confident are financially sound, you should do well in the long term.

3. Pay off debt with it

When you owe money, you have a commitment to creditors that eats up some of your income. Paying it off can save you money on interest and reduce monthly expenses during uncertain times. 

While many creditors have agreed to suspend payments in order to help people affected by lockdowns due to the coronavirus, interest still accrues on most debts even if payments are paused. If you can wipe out your debt using your tax refund, you eliminate one obligation you have to worry about. And you won't end up with a bigger balance, as you would have if you stopped paying during the crisis.

Which option is right for you?

Ultimately, the best thing you can do with your tax refund will depend on your current financial obligations and economic situation. Decide what option makes the most sense to help you cope (or even thrive) in these unprecedented economic circumstances.

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