Nothing is certain in life but death and taxes. But for nearly 8 out of 10 taxpayers, taxes won’t be quite as painful because they’ll be receiving a tax return. In 2014, the average tax refund was $3,034.
So now the question arises, what do you do with your refund when it arrives? For some it will come at the perfect time to cover an unexpected expense like an emergency home repair or a fender bender. But for others, their refund offers them the opportunity to make an impact in their personal savings or spending. We recommend several smart uses for your tax refund.
Bump up emergency fund
Smart financial planning suggests that you have an emergency fund in place for emergencies and unforeseen expenses. You should realistically plan to have 6 months of expenses in savings. Pulling a small amount from each paycheck can take a while to build up, but your tax return can get you well on your way.
Because you may need to access your emergency funds quickly, utilize a savings or money market account which allows you to withdrawal your money at any time with no fees or penalties.
Open up an IRA
Your tax refund can be a great way to kick-start your retirement savings. Outside of any employee-sponsored retirement plan, you can also contribute to an Individual Retirement Account.
IRAs are share certificate or money market interest-earning accounts that offer the benefit of being tax deferred. You start to grow your funds in an IRA Accumulation Account, and then switch over to a higher interest IRA account type once you’ve hit your target savings.
If your yearly income is under $114,000 for a single or $181,000 if you’re married, you can contribute up to $5,500 into an IRA account in 2015.
Pay off high interest debt
Analysis of Federal Reserve statistics and other government data indicates the average American household carries $7,283 in credit card debt. If you’re carrying credit card debt, a smart use for your tax refund is to pay off your cards, or make a sizable dent. Not only does it allow you to save the money that would have gone towards paying down a credit card balance each month, it could also improve your credit score.
If your credit card debt is in good shape, then consider using your refund to make additional payments on other high-interest debt, including student loans, auto loans, or payday loans.
Refinance your mortgage
While home prices are rising, mortgage interest rates are still low. Perfect if you love your home, but don’t necessarily love your mortgage payment.
Refinancing your mortgage can require that you pay closing costs and other fees, which is where you can make smart use of your tax refund.
If you’re looking to put your home on the market soon, or just want to spruce things up a bit, you can use your refund towards a home improvement project and quickly increase the value of your home.
Tax refund mistakes
In addition to suggestions for smart uses for your tax refund, we also offer a few missteps to avoid once you receive your refund.
- Don’t spend it frivolously
- Don’t use it as a down payment for a purchase that will only increase your debt (a new car or big screen TV)
Do you have a tax refund coming your way? How do you plan to save or spend it wisely? The financial professionals at Diamond can help you with any questions you may have.
Protect your refund with these additional tips from Diamond’s partner, IDT911.
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