If inflation has eaten away at your budget the way waves erode a beach, then your tax refund might just provide a much-needed protective barrier.
As of March, prices are up 6 percent over the past 12 months, according to the most recent consumer price index. At the same time, just over half of filers (55 percent) are expecting tax refunds for the 2022 tax year, with an average expected refund of $2,205, according to the 2023 Nerdwallet Tax Report. Financial experts say consumers can use that windfall—which is really just a delayed paycheck that you already earned—to help offset the strain of those higher prices.
Unload High-interest Debt
With rising interest rates, variable-rate debt becomes more expensive—including credit cards. That’s why many financial experts put paying off debt at the top of the priority list, even considering it a type of investment.Save in a High-yield Account
Rising rates also mean rising yields on savings accounts, so you can save your refund and earn more on it. “If you already have a high-yield savings account, you can also look at CDs,” says Marguerita Cheng, a certified financial planner and the founder of Blue Ocean Global Wealth in Gaithersburg, Maryland. CDs, or certificates of deposit, offer higher yields in exchange for less liquidity.Fund Long-term Goals
Because higher prices have cut into long-term savings goals like retirement and college, a refund can offer an opportunity to get back on track, Cheng says. “You don’t have to put a lot in, but it can be the seed money,” she adds, noting that her son is using his first refund as he begins his career to open a Roth IRA.Upgrade Your Home
In many real estate markets, rising home prices along with the higher interest rates make it harder to buy your dream home. Instead, use your refund to improve your current home, suggests Ryan Greiser, a certified financial planner and the founder of the financial firm Opulus in Doylestown, Pennsylvania. New flooring, energy-efficient appliances or improved windows can boost your home’s energy efficiency as well as increase its value.“We love the idea of people loving the space they live in,” Greiser says, especially when they’re priced out of buying a new home.
Create More Income
Remodeling a room in your home to create a rental unit could generate income that helps offset inflation for years, says Melia, who operates a couple of short-term lodging options through vacation rental website Airbnb. He says upfront investments could include better furniture and decor: “You want to be able to stand out.”Find Small Ways to Treat Yourself
While air travel and other bigger splurges might be prohibitively expensive, your refund can give you more affordable pleasures, even after taking care of other priorities, Cheng says. She indulges in listening to audiobooks. “I was getting anxiety watching the news at the gym, so instead, I listen to audiobooks,” she says.Adjust Your Withholdings
Lastly, if you’re receiving a refund, it means you overpaid taxes in 2022. You might be better off adjusting your withholdings so you receive more in each paycheck instead. “If you’re getting more than $3,000, then you probably want to revisit your withholdings because that could be $200 to $300 a month,” Cheng says.And that could help offset those higher gas, restaurant or grocery bills all year long.