3 Hacks to Get the Most Out of Your Tax Refund

It's funny how much time we spend trying to figure out how to save money on taxes, yet we don't spend much time thinking about ways to make a refund work for us. For example, the average tax refund so far this year is a little over $3,200, but the average person doesn't have much to show for it. What if this year was different, and you decided to make your refund grow? Here are three easy ways to make that happen.

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1. Jettison high-interest debt

If you have credit card debt, I don't have to tell you that the current credit card interest rate is more than 22%. Let's say you're carrying $3,000 in debt, making a monthly payment of $85. At this rate, it will take nearly five years to pay the card off in full, and you'll end up parting ways with $1,873 in interest payments.

That's $1,873 you could have used to make small repairs around the house, enjoy a weekend getaway, or start a holiday fund.

If Benjamin Franklin was right and "a penny saved is a penny earned," using your tax refund to pay off high-interest debt is like paying yourself $1,873.

2. Pad your emergency fund

Experts suggest we keep enough money to cover three to six month's worth of expenses in an emergency savings account,. But let's face it, saving that much sounds pretty intimidating. Whether your savings account is nearly at your goal or you haven't begun to save, padding your emergency fund provides several benefits, including:

• You're less likely to panic if something unexpected happens, like an illness or a job loss.
• You're less likely to be forced to use high-interest credit to pay bills if an emergency occurs.
• You'll rest easier at night.

Again, imagine you deposit your $3,000 refund into an emergency fund. You decide to put it in a high-yield savings account to take advantage of today's high interest rates. At a rate of 5.30% APY, your $3,000 would earn $159 in interest in one year. Better yet, if you let it ride, that $159 will earn its own interest. The longer you leave the money, the faster it begins to grow, thanks to compound interest.

3. Invest it

Roughly 25% of American households have no money saved or invested for retirement. That means no traditional IRAs, Keogh accounts, 401(k)s, 403(b)s, Thrift Savings Plans, or pensions. If you're among those who have not begun to save for retirement, you may ask if there's any point in doing so now.

The answer to that is yes. Here's what would happen if you put $3,000 in a retirement account now, and that account averaged an annual return of 7%:

• In 10 years, it would be worth $5,901
• In 15 years, it would grow to $8,277
• And in 20 years, it would be worth $11,609

But what if you added $200 per month to your IRA during that time?

• In 10 years, you would have $39,061
• In 15 years, there would be $68,587
• In 20 years, it would grow to $109,998

Or you may already have a retirement account but want to save for something special in retirement, like a trip to see where your grandparents immigrated from or a classic car you can work on in the garage. You don't have to start with a huge chunk of cash. Your tax refund will provide an excellent foundation for anything you add to it through the years.

Getting a tax refund feels good, even when we know it means we essentially loaned the government money interest-free. There's a sense of feeling flush on the day that refund hits our checking accounts. Before you decide for sure what you want to do with your refund, though, determine whether you need to spend it now or if you can wait, watch it grow, and enjoy it later.