Did you get a tax refund this year or do you expect one soon? If so, you’re certainly not alone. Roughly 73 percent of taxpayers got one last year, receiving an average of $2,860, according to the Internal Revenue Service, or IRS. If you actually manage to make good use of this government-given windfall, however, you’ll be in much more select company.
Most people use tax refunds as fuel to be burned shopping, according to data from the National Retail Federation, while only 49 percent plan to save. The question is: Which side are you on?
If you want to choose the path of financial responsibility, here are four money-smart ways to use this year’s tax refund.
[See: 10 Smart Ways to Spend Your Tax Refund.]
Pay down debt: We are collectively incurring debt at an astounding rate, which is scarily reminiscent of the run-up to the Great Recession. The $89.2 billion in credit card debt that we added to our tab in 2016 is a post-2007 record and the third-largest annual increase in the last 30 years. Adding to our cause for concern, WalletHub projects that outstanding credit card balances will blow by $1 trillion in 2017. So if you’re like the average household, which owes a staggering $8,377, using your tax refund to pave a path toward debt freedom would be a very wise move. You would save roughly $644 on interest by using the average refund ($2,860) to repay a chunk of that average balance in one fell swoop, assuming a 36-month repayment timeline for your full balance and the market average 13.61 percent APR.
Repaying amounts owed will also have a positive impact on your credit score, considering the importance of credit utilization — how much of your available credit you use — to your overall rating. And we definitely have some room for improvement, seeing as the national average credit score is just barely “good,” at 669, based on TransUnion data for VantageScore 3.0.
[See: 7 Most-Missed Tax Deductions and Credits.]
Build your emergency fund: In many ways, emergency fund contributions are even more important than debt repayment efforts. After all, what would happen if you scrape and claw your way back to debt freedom, only to get hit with an unexpected major expense? You’d end up right back where you started. So if you don’t yet have a financial safety net, using your government rebate to lay the foundation for one is a strategically strong move.
Make a retirement contribution: Are you a thief? Didn’t think so. Why, then, would you want to rob your future self? Failing to maximize your retirement contributions is tantamount to doing so, and most of us are both perpetrators and victims in this regard. After all, 88 percent of Americans believe we’re facing a retirement crisis, and nearly 25 million retirees will be near or below the poverty line by 2035, according to the National Institute on Retirement Security. So contribute to your company plan or individual retirement account, also called an IRA, and let your money reap the rewards of tax-free compound interest.
[See: Answers to 7 Burning Tax Questions.]
Make it your last refund: Most people view tax refunds favorably, but have you ever thought about yours as evidence of having given the federal government an interest-free loan? That’s basically what you’re doing when you overpay your taxes and are due a refund. If you had possession of that money in the interim, instead of Uncle Sam, it could be earning a return in either a deposit or investment account. In other words, it’s best to be like Goldilocks and pay just the right amount — nothing more, nothing less.
Finally, should you find that you enjoy financial prudence, you can build on these efforts by tidying up the rest of your financial house, with a particular emphasis on protecting yourself from identity theft and fraud. Such scourges of modern commerce have the potential to not only jeopardize your refund, but also cost you money and cause considerable headaches.
Fortunately, a number of services offer free 24/7 credit monitoring, which serves as an early-warning system for any such issues.
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4 Fantastic Ways to Put Your Tax Refund to Use originally appeared on usnews.com
