Ways to Fight Inflation with Your Tax Refund
As the cost of living continues to rise, consumers can strategically use their tax refunds to help alleviate some of the burden. Inflation can erode a budget like waves eat away at a beach, but a tax refund can act as a temporary buffer!
According to the latest data from the Consumer Price Index in March, prices have increased by 6% over the preceding 12 months. Yet, the average tax refund for the year 2022 is $2,205, and 55% of filers anticipate receiving one. Financial experts suggest that this windfall, which is essentially a delayed paycheck that you previously earned, can help consumers cope with the impact of the price increases. Many people are expecting tax refunds this spring, which will come at a convenient time.
Here are 6 ways to fight inflation with your tax refund:
1. Reduce high-interest debt
Increasing interest rates increase the cost of variable-rate debt, especially credit cards. In fact, many financial experts consider debt repayment an investment. Not only does paying off high-interest debt save money on interest payments, but it also improves credit scores, making it easier to qualify for future loans with reduced interest rates.
In addition, it frees up more discretionary income for other investments, such as retirement or emergency savings. Utilizing your tax refund to pay off a credit card debt with an interest rate of 20% yields an instant, tax-free 20% return on investment. It's not a novel concept, but it's the most impactful action a consumer can take, according to the math.
Resource: Debt Snowball vs. Debt Avalanche: Which Is Better for Paying Off Credit Card Debt?
2. Save in a high-yield account
As rates rise, so do savings account yields, so you can save your tax refund and earn more on it. If you currently have a high-yield savings account, you can also consider certificates of deposit. Certificates of deposit, or CDs, offer higher returns in exchange for reduced liquidity.
It is essential to keep in mind that certificates of deposit (CDs) often require you to lock up your assets for a particular period of time, so make sure you won't need the funds before the CD matures. Also, before committing to a particular savings account or certificate of deposit, consider looking around for the best rates and terms. Save enough to develop or bolster an emergency fund, which could assist you in the event of a job loss or unexpected expense.
Having an emergency fund keeps you from going back into a debt spiral, given that life is full of unforeseen events.
3. Fund long-term objectives
A tax refund might be an opportunity to get back on track with long-term savings goals, such as retirement and college tuition, when increasing prices have hampered progress. It doesn't have to be much, but it can serve as seed money.
For example, you can start a Roth IRA with your first tax refund. A Roth IRA is a great option for long-term savings as it allows your money to grow tax-free, and you won't have to pay taxes on withdrawals during retirement. Additionally, contributing to a Roth IRA early on can help maximize the benefits of compound interest.
Similarly, you might attend to other deferred financial responsibilities, such as purchasing life insurance, especially if you have young children.
Resources: College Funding Hero
A Beginner's Guide to a Roth IRA Plan
4. Upgrade your home
In many real estate markets, it's getting harder to buy your dream home because prices are going up as well as interest rates. Instead, put your tax refund toward improving your current home. Improved flooring, energy-efficient appliances, or upgraded windows can improve both the energy efficiency and the value of your property. Not only will these upgrades make your home more comfortable and enjoyable to live in, but they can also save you money on utility bills in the long run. Plus, if you do decide to sell your home in the future, these improvements can help attract potential buyers and increase its resale value.
TIP: Investing in energy-efficient upgrades for your home is a smart decision that can benefit both your wallet and the environment. It's a win-win situation that allows you to enjoy a more comfortable living space while reducing your carbon footprint.
For your outdoor space, maybe invest in a chicken coop and gardening supplies to harvest eggs and vegetables— all of which have become more expensive at the grocery store. If you have neighbors with skills such as carpentry, you could barter with them for additional savings. Not only will you save money on groceries, but you'll also be contributing to a more sustainable lifestyle. Additionally, bartering with neighbors can create a sense of community and strengthen relationships within your neighborhood.
5. Increase your income
Even after paying for necessities, your tax return may still allow you to indulge in smaller, more manageable luxuries. Think about putting your tax refund toward a side job or learning a new skill that could help you make more money in the long run. By investing in yourself, you can increase your earning potential and improve your financial situation.
Consider taking a course or certification program that aligns with your career goals or starting a side business that utilizes your skills and interests.
6. Adjust your withholdings
Lastly, if you’re receiving a refund, it means you overpaid taxes in 2022. To avoid overpaying taxes in the future, you may want to adjust your withholdings on your W-4 form. This will ensure that you're not giving the government an interest-free loan and have more money in your paycheck throughout the year!
You could get more money in each paycheck if you changed your withholdings. If your monthly income is more than $3,000, you may want to reevaluate your withholdings, which could amount to $200 to $300. And that might help all year round with the greater costs of gasoline, eating out, and grocery shopping.
IMPORTANT: It is essential to note that adjusting your withholdings may result in owing taxes at the end of the year, so it's best to consult with a tax professional before making any changes. Additionally, if you have experienced any major life changes, such as getting married or having a child, it may be necessary to update your withholdings accordingly.
Tax returns will arrive just in time for many people this 🌷 spring. You can strategically use these tax refunds to offset some of the costs of growing ⬆ everyday prices. It *can* come in pretty handy if inflation has washed away your savings.
Remember, that extra cash — a deferred payment on wages already earned — can help soften the 😓 blow of price increases.
Want advice on what’s the best strategy for your tax return? Click here.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.