Are you one of the 54% of tax-filing Americans expecting a refund from the IRS this year? According to the US government, the average refund is around $2700. Here’s the InCharge Top 10 on How to Spend Your Tax Refund.
#1. Skip the Refund Anticipation Loan
We have a deal for you. We’ll loan you some money and the interest rate is only 250%. What do you say? If you answered no, then skip the refund anticipation loan offered by tax preparation firms. With online filing, you can get your refund in as fast as 1 week. Wait and skip the fees.
#2. Skip the Refund Anticipation Check
The Refund Anticipation Check is a short term bank account set up by your tax preparer. It’s designed for people who don’t have bank accounts. The account is controlled by the tax preparer and fees are taken out once your refund arrives. If you do not have a bank account, consider setting up a no-fee account with a local credit union. Come to your tax preparer with your account number details. Don’t pay someone else to set up an account for you when you can do it yourself for free.
#3. Beef Up Your Emergency Fund
Now that we have figured out how to get 100% of your tax refund, let’s look at what you can do with it to improve your financial situation. A recent poll by the National Bureau of Economic Research revealed that 50% of Americans have no money set aside for emergencies (car breakdown, unexpected medical bills, etc). If you are in the ‘no emergency fund’ 50%, don’t despair. Use your tax refund to build a $2000 emergency fund.
#4. Pay Down (or off) your Credit Cards
Join the 63%. That’s right. Join the majority of Americans who have no credit card debt. Let’s be pretty clear here: If you feel ok living without much financial stability, then by all means stay in the 37%: pay your monthly interest fees and finance charges. Consider this: imagine going shopping where the storefront windows read “Pay 30% more” or “Pay 70% more.” Every time you buy something on a credit card and carry the balance, you are paying more. After building up your emergency fund, use your tax refund to pay off credit card debt.
#5. Start a Pre-paid college fund for your kids (or pay down your own student loans)
Suppose you have an emergency fund in place and your credit cards are totally paid off. We recommend starting an education IRA for your children. Why? The money you invest will grow tax free until your children go to college. Research shows that kids with college funds are more likely to go to college, because someone has invested in their future; someone has shown them (through action) that their future is worth it. Kids with college funds are not just more likely to go to college, they are more likely to succeed in college. (Lack of financial resources is the number one cause of drop out). Education is the single biggest predictor of long term employment stability and income. College grads make double what high school grads make. Don’t have children? Pay down (or off) your own student loans with your tax refund.
#6. Pay Down (or off) Your Auto Loan
Here’s another idea. We recommend using your tax refund to pre-pay on your car loan or pay it off if you can. Owning your car outright will can free up $200-$300/month. Paying off your car early means having extra money not once a year when you get your tax refund but every single month. You could use this extra money to accomplish #7, #8, #9, and #10.
#7. The Big Emergency Fund
Once you’ve gotten used to having a small emergency fund (a few thousand dollars), it’s time to start saving up for the “Big Emergency Fund.” The Big Emergency Fund is designed to get you and your family through the big things. Did you know that the average length of unemployment is 9 months? Could you maintain your expenses for 9 months without employment? Consider adding your tax refund to your emergency fund. This money will help you sustain a major loss of income or unexpected financial burden.
#8. Save for a Downpayment
Join the 66% of Americans who call themselves homeowners. With today’s low interest rates and low purchase prices, you could get a great home at an affordable price.
#9. Retirement: Save for it.
What does your retirement look like? Will you be reading a book (if those still exist) on a front porch or working the early shift at Walmart? Unfortunately, many Americans see no end when it comes to work. You can have the retirement you want, especially if you start young. Open an IRA with your tax refund.
#10. Enjoy yourself.
Congratulations and welcome to the good life. You have no debt, a retirement strategy, and education funds for the kids. Go on a vacation. Buy yourself a big screen TV. Before you go and book your cruise, we have one piece of advice for you: give yourself a raise by adjusting your withholding. That way you’ll have more of your money in your pocket all year long.