Did you know that 80 percent of taxpayers are due a tax refund because we’ve been paying too much to the government throughout the year in our paychecks? Some people will tell you to change up your withholding because you are giving the powers that be an interest free loan all year long. While that is true, this system of forced savings could be a good thing for you – and with the average tax refund averaging about $3k, it can be of some serious aid to your finances in these three categories:
1. Saving – Lets face it, you’ve heard money saving gurus say that we need at least six months of “rainy day money” in our savings account but life happens and socking those funds away can be hard. Your tax refund could be the perfect opportunity to jump start your way back towards having a money cushion in your life. I know you won’t be earning much interest right now, but the peace of mind you’ll have is priceless.
2. Debt – If you have outstanding credit card debt then using your tax refund for the purposes of paying that down could also be a perfect landing spot for that tax refund. The financial and psychological weight that your credit card debt is carrying in your life should be wiped out as soon as possible. Maybe you don’t have any plastic debt but are still carrying a loan on your car – It is almost always a good idea to toss that extra monthly obligation out of your life. Make sure to start with your highest interest rate debt first for the maximum benefit.
3. Investing – This is hardest one of these three options to commit to but seize the opportunity if you can! Think about taking a thousand dollars out of this tax refund and putting it towards an IRA of your choice. Most low cost investment firms will allow you to open up an IRA with $1,000 being the minimum level of investment (think T Rowe Price or Vanguard). Your investment in a Roth IRA won’t lower your tax bill but if you invest in a non deductible IRA you’ll actually be seeing a bigger refund. An added benefit is the Federal Saver’s Credit which helps low income earners get some big time tax breaks on their investments. I would refer you to the IRS website but it would just confuse you more. Google the term for more details.
When that tax refund check hits your bank account, don’t start planning your next vacation. Although I think vacations are necessary and important I recommend planning those according to your normal budget. Make this refund work to your ultimate advantage by saving dough, extinguishing debt, and investing for the long haul. Good luck and I would love to hear how you used your refund.