Tax refund season. It can be like Christmas come early, or late!
Either way, this is an excellent opportunity to begin the new year making wise financial decisions. According to the IRS, the average tax refund in the United States in 2016 was $3,050.
Americans traditionally find various uses for their tax refunds which range from saving to spending, and everything in between. Have you been thinking about what you should do with your tax refund? Consider the following suggestions to guide your decisions during the upcoming tax return season.
Pay down debt. Most Americans are currently carrying some form of debt, whether that be credit card debt, student loan debt, vehicle loans, etc. Using your tax return to reduce high interest loan debt is a smart move because not only will you reduce the principle, but you will also manage to reduce the amount of interest you will owe in the future. Compare the impact of putting your tax return in a savings account that earns 1 percent interest vs. reducing credit card debt with an 18 percent Annual Percentage Rate. Eliminating debt will give you much more bang for your buck.
Contribute to emergency savings. Nearly six in ten Americans don’t have enough savings to cover a $500 to $1,000 unplanned expense. While experts recommend keeping three to nine months of take-home income in an emergency fund, even $500 can be helpful in the case of unexpected health care, housing, or auto expenses. Many people are financially vulnerable in the case of job loss or natural disasters. Adding to your emergency savings will make you more financially secure. Although it isn’t as fun or exciting as buying a new vehicle or the latest technology, contributing to your emergency savings is one of the wisest uses of your tax refund.
Contribute to retirement savings. Think about the future. Contribute to your retirement. Even if you have been contributing a portion of each paycheck to your retirement savings, it can seem as though there is never enough money to feel financially secure in the future. Pad your retirement accounts with your tax refund.
Grow college savings. Start a college fund for your children. Whether you already have kids or you plan to have kids in the future, it is never too early to start saving. In an era of sharply rising costs of higher education, saving for college is an excellent use of tax refund dollars.
Invest in the stock market. Although it would be advisable to address outstanding debts first, investing in the stock market is a good use of tax refund dollars because it has pretty consistently outperformed savings accounts, bonds, and Certificates of Deposit.
Spend it wisely. If you elect not to use your tax refund for any of the above and you have decided you want to spend it, do yourself a favor and spend it wisely. Use tax dollars to improve your vehicle or your home because these expenses pay dividends in the future as well. For instance, renovating you home has the future added benefits of saving on energy costs and improving the value of your home.
Contact the Newton County office of Mississippi State University Extension at 601-635-7011 for more information on smart money management.
