There is nothing like the feeling of a nice tax refund landing in your account. How many different ways have you already envisioned yourself spending this year’s windfall? Yes, we recognize that dreamy look on your face when you are drinking your morning coffee—what a feeling, right? The average American is getting back $3,034 on their return this year, according to a recent update from the IRS. Sure, you could exhaust your entire refund splurging on something special—but first; consider what $3,000 or more could do for your finances:
1.) Pay off debt. Here’s the single smartest move you can make with your income tax refund. Knocking down your largest credit card debt or loan by $3,000 gets you a real leg up. The payoff goalpost is that much closer, and interest on your balance eats away a little less each month.
Why not turn your tax refund into a great big “snowball” payment. Put it all on the debt or loan with the largest balance, while making only minimum payments on your other debts. Keep the snowball rolling in the months to come by continuing to put as much as you can on that one top bill while keeping the others in maintenance mode. Then once your highest balance bill is paid off, roll whatever you normally pay on that bill into your payment on the bill with the next highest balance. The payments get bigger and bigger as you pay off cards. This focus fire method is more effective than spreading your payments out over several bills.
2.) Build your emergency fund. Experts recommend that you save six months’ worth of income in emergency savings. This nest egg should be reserved only for dire circumstances such as a lost job or medical emergency. According to labor statistics reports, the mean annual salary for Americans in 2013 was $46,440. The average emergency fund should be somewhere in the neighborhood of $23,000. An average $3,000 tax refund would get you well over 10 percent toward that savings goal—a safety net you can count on!
3.) Make a down payment on a car. It is part splurge, part smart money management. Think about it. Your refund could be all or most of a down payment. With a new auto loan, used auto loan, or auto refinancing loan from PenFed, you could find yourself driving away with just the right car for your lifestyle and budget. If you are looking for the best deal on monthly payments, check out the PenFed Payment Saver auto loan.
4.) Fix up the house. Improving your home is not only rewarding to do and satisfying to enjoy; it can be a sound investment, as well. As long as you target renovations that hold their value or push up the value of your home, your tax refund could be a great opportunity to feather your nest.
5.) Put aside a chunk for retirement. Saving for retirement is far from the most glamorous use for your tax refund; however, when the money slides straight past your wallet into a savings plan like an IRA, you will never really miss it and with so much time to grow until you use it, you will appreciate this money later.
Do not sell yourself short all year long
Do not lose sight of the fact that the tax refund you anticipate so eagerly every year is actually money you could have been enjoying all year long. Withholding more taxes from your paycheck than you owe, amounts to giving the government an interest-free loan (for the average refund of $3,000) it adds up to about $250 per paycheck. Instead of letting the government sit on it for a year, why not put it to work every single month? Check with your HR office, as your employer should have a form to help you make these adjustments.