3 Ways to Redeploy Your Tax Refund
Hint: It doesn’t involve purchasing a flat-screen TV.
The process of filing taxes can be tedious, but like most people, you might look forward to the end result if you’re receiving a large refund. The Internal Revenue Service says it expects more than 70 percent of taxpayers to receive refunds this year, and notes that in 2017, the average refund was $2,895.
While the prospect of taking a long vacation, buying the new flat screen you’ve had your eye on, or remodeling your house are the most appealing ideas, it might benefit you in the long run to think about your financial situation and how your refund can help you improve it.
A new survey from Credit Karma Tax shows that consumers are making smart choices for their refunds, noting that more than half of those surveyed plan to save their refund or use it to pay down debt.
The survey found that:
- 22 percent plan to save their refund
- 24 percent will put it toward paying off debt, including student loans and medical bills
- 16 percent say they will pay off credit card debt
- 11 percent plan to save for a specific goal
- The remainder plan on using their refunds to purchase something, or for an event or travel
To make the best use of your refund, consider analyzing your finances to determine any shortfalls or areas that need improvement. There are several categories below associated with your personal finance management and these areas may be a good place to begin.
1. Do You Have Debt?
If you’re carrying credit card debt or trying to pay off a small loan, your tax refund may help you chip away at or eliminate your remaining balance. Paying off your balance will free up more income each month, which can be put toward savings, a future goal or simply more money for your living needs.
2. Do You Have an Emergency Savings Account?
Studies show that too few Americans lack the cash cushion they need to protect them in the event of a sudden financial crisis. Many people would be financially devastated by an unexpected medical emergency, car repair, or job loss, while others would be forced to drain their savings accounts or tap into their retirement funds early.
To avoid these scenarios, most industry professionals encourage you to save enough money to cover roughly three to six months’ worth of expenses. Using your tax refund to get this account started may lessen the shock of trying to build your emergency savings.
3. Are You Contributing Sufficiently to Your Retirement?
If you have an IRA set up, why not use your tax refund to boost your contributions? Not only will you improve your nest egg savings, but you will also benefit from the tax advantages of this account.
Keep in mind that you don’t have to use the entirety of your refund toward your financial goals. However, using the windfall to make improvements to your financial situation can contribute to your financial security and have long-term payoffs.