Apr 11, 2023

6 Ways to Use Your Tax Refund to Fight Inflation

As the cost of living keeps going up, people can use their tax refunds in smart ways to help ease some of the pressure. Inflation can eat away at a budget like waves eat away at sand, but a tax return can help for now! Here are some good ideas to think about.

6 Ways to Use Your Tax Refund to Fight Inflation

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Consumers should strategically use their tax refunds to lessen the burden as the cost of living continues to climb. A tax refund might serve as a short-term cushion against inflation, which may deplete your budget.

The new data from the Consumer Price Index in March show that prices have gone up by 6% in the past year. Still, the average tax return for 2022 is $2,205, and 55% of people who file expect to get one. Experts in finance say that this windfall, which is basically a delayed paycheck that you made before, can help consumers deal with the effects of the price hikes. This spring, many people will get tax returns, which will come at a good time.

Here are 6 ways to use your tax return to fight inflation:

1. Reduce high-interest debt

When interest rates go up, the cost of debt with fluctuating rates, like credit cards, goes up. In fact, many financial experts consider debt payback an investment. Paying off high-interest debt not only saves money on interest payments, but it also raises credit scores, which makes it easier to get loans with lower interest rates in the future. Also, it frees up more discretionary money for investments like retirement savings or savings for an emergency. If you use your tax refund to pay off a credit card bill with a 20% interest rate, you get a 20% return on your money right away that isn't taxed. It's not a new idea, but math shows that it's the most important thing a customer can do.

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.

Source: Vincere Tax

3. Fund long-term objectives

When rising prices have made it harder to save for long-term goals like retirement and college, a tax return could be a chance to get back on track. It doesn't have to be a lot, but it can be a start-up fund.

For example, your first tax return can be used to start a Roth IRA. A Roth IRA is a great way to save for the long term because your money can grow tax-free and you won't have to pay taxes when you take money out. Also, putting money into a Roth IRA early can help you get the most out of 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

4. Upgrade your home

Prices and interest rates are going up, making it harder to buy your dream home in many real estate markets. Instead, use your tax return to make improvements to the home you already have. Your home's energy economy and value can both go up with new flooring, energy-efficient appliances, or better windows. These improvements will not only make your home more comfortable and enjoyable to live in, but they can also save you money on your energy bills over time. Also, if you decide to sell your home in the future, these changes can make it more appealing to buyers and raise its value.

TIP: Investing in upgrades that make your home more energy efficient is a smart choice that can help both your wallet and the world. It's a win-win situation because you get a more comfortable place to live and your carbon footprint gets smaller.

For your yard, you might want to buy a chicken coop and gardening tools so you can grow your own eggs and veggies, which are all getting more expensive at the store.  If you have friends who know how to do things like build things, you could trade with them to save more money. You'll not only save money on food, but you'll also help make the world a better place to live. Bartering with your neighbors can also give you a sense of community and make your ties with them stronger.

Here are 21 Budget Home Improvement Ideas

5. Increase your income

Even if you use your tax return to pay for needs, you may still be able to spend it on smaller, more manageable luxuries. Think about using your tax returns to get a side job or learn a new skill that could help you make more money in the long run. By spending money on yourself, you can improve your financial circumstances and make more money.

You could take a class or get a certification that will help you reach your job goals, or you could start a side business that uses your skills and interests.

6.Adjust your withholdings

Lastly, a tax return means that you paid too much in taxes in 2022. You might want to change your withholdings on your W-4 form so you don't pay too much in taxes in the future. This will keep you from giving the government a loan with no interest and give you more money in your paychecks all year long. If you changed your withholdings, you could get more money in each pay check. If you make more than $3,000 a month, you might want to change your withholdings, which could cost you between $200 and $300. And that could help all year long, when gas, eating out, and food shopping all cost more.

IMPORTANT: It's important to remember that changing your withholdings could cause you to owe taxes at the end of the year. Before making any changes, it's best to talk to a tax expert. Also, if you've had a big change in your life, like getting married or having a child, you may need to change your withholdings to reflect that.

Bottom Line:

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.

I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you.

About the Author

As Managing Partner of Vincere Wealth, Josh assists clients in navigating financial challenges and making sound financial decisions. Having someone guide you in making sensible financial decisions today can have a substantial impact on your future financial wellbeing. Josh takes great pride in guiding customers through the complexities of taxes, real estate, businesses, employer stock and international financial planning.

Learn more about Josh.

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