The ABC’s to Spending Your Tax Refund
A hot question on many Americans’ minds right now is, “How will I spend my tax refund?” Many people consider their refund “found” money and dream of splurging on big-ticket items like a car, exotic vacation or new home entertainment center.
At the end of February last year, almost 40 million tax refunds worth nearly $125 billion were issued with the average refund totaling $3,120, according to the Internal Revenue Service (IRS)1. That is a decent sum of cash, and you may find yourself compelled to freely spend…but hold off just a minute.
It’s best to think rationally about ways to use that money. All you have to do is consider your ABC’s. Here’s how:
Allow it to Grow – Give your tax return an opportunity to grow and provide you a more secure financial future by adding it to your retirement account. If you don’t have one, start one. If your return was significant enough to max out your yearly contribution, this move could earn you a decent tax deduction—which makes your refund even larger in the long run.
Bank It – Patience is key to this approach and requires holding back your impulse to binge right away. Get your financial priorities in line before spending your cash by temporarily stashing it away in a high-yield savings account. Traditional brick and mortar banks typically offer low-yield returns on savings accounts. Today, more high-yield savings accounts can be found online—with virtual banks like Synchrony and Ally Bank.
Create a College Education Fund – Even if your kids or grandkids are toddlers now, they will grow before you know it and college (and fear of the financial drain) will soon be on the horizon. Consider opening a 529 College Savings plan now to invest in your child’s educational future. Doing so could help defray the cost of college and you may enjoy a tax break from qualified states (learn more here).
Dissolve Debt – While you could spend the money now, it won’t help eliminate the debt you have piling up and the growing interest. You could go one of two ways here: 1) pay off all of your debt at once (if possible) to free yourself for investing in your future, or 2) refinance a high interest card to get a better interest rate and make it a priority to pay more than the monthly minimum while also putting some of your refund cash into an investment account – like a retirement fund, stocks or college savings plan.
Evaluate Your Emergency Fund – While it may not seem necessary now, if you have an emergency later, you’ll be glad you took the step to create an emergency fund. If you don’t have at least $1,000 saved as a safety net for a worst-case scenario, allocate your tax return to building your emergency fund. And if you already have an emergency fund, there is no harm in adding to it. Ideally you should have six months of living expenses in savings.
Here is another tip: If your refund was significant this year, you may want to change your withholding to keep more of your money throughout the year. Otherwise, you will continue loaning your money (interest-free) to the government … instead of giving yourself a little raise.
If you have any questions or would like to discuss further, feel free to reach out to me at 217-971-1256 or firstname.lastname@example.org.