6 Smart Money Moves to Make with Your Return
May 12, 2020
So you received a great tax return, now what…
In 2019, the average tax refund was $3,086. If you are one of those individuals who will likely be receiving a similar amount this season, consider some of these smart investments. While they may not be as fun as a flashy vacation or shopping spree, they will pay off in the future by contributing to your long-term financial success.
- Pay Down Debt
If you have a large amount of high interest revolving debt, AKA credit card debt, paying this balance down should be your priority. Credit card interest rates average at about 16% and many can be much higher. These accumulated interest fees can get out of control quickly hurting your credit and creating a stressful burden. By using that tax refund as a lump sum payment, you could be saving yourself $1,000’s of dollars in interest fees and boosting your credit score. If your credit card balance is not a current financial issue, pay down other forms of debt like student loans or car loans. Be sure to pay down debt with the highest interest rate first as that will save you the greatest amount of money in the long run.
- Save for a Rainy Day... or Rainy 6 Months
According to Bankrate’s latest Financial Security Index, almost 30% of U.S. adults have no emergency fund. An emergency fund is made up of highly liquid assets (usually cash) that are readily available for use in the event of an unexpected event such as the loss of a job or debilitating illness. An emergency fund should contain enough money to cover between three and six months’ worth of expenses. If you are part of that 30% without an emergency fund, use at least a portion of your tax refund to start one and continue to contribute to that account until the three to six-month goal is met.
- Save For Retirement
Consider opening an Individual retirement account with a portion of your refund. Experts recommend saving 10-12 times your current income in order to have a comfortable retirement and it is never too early to begin saving. 401(k)s through your employer are great, but you can also open an IRA to supplement that plan. In most cases, contributions to traditional IRAs are tax-deductible. For example, if you put $5,000 into an IRA, your taxable income decreases by the amount of the contribution (in this case $5,000). There are limitations to what you may contribute depending on the type of IRA account and your earned income, so it is helpful to work with a financial planner to discuss your options.
- Make Investments in Your Home
There are many small investments you can do in your home that will make you enjoy your home more while adding resale value if you ever decide to move. Some affordable home improvement ideas include repainting a room, upgrading bathroom fixtures and faucets, adding new landscaping, and organizing closets/garages. Look to upgrade inefficient appliances as well. Purchasing a programmable thermostat or energy-efficient refrigerator can save you money on utility bills.
- Increase Coverage
Here in Middle Georgia, the rain seems like it is never going to stop and that can be damaging to property. Consider buying flood insurance or increasing liability coverage. Often you can add such coverage for under $1,000. While we all hate purchasing insurance, it could be the difference between a devastating financial loss and setting yourself up properly for rebuilding/recouping.
- Kickstart Your Goal
So, you are in a good place financially. Your debt is low, your emergency fund will last 6 months, and you are comfortable with the retirement contributions you have made. Now could be the time to kickstart your goal. Focus on goals that add value financially. Maybe you have been wanting to purchase a home or perhaps you are ready to tackle that degree. Whatever your goal is, start a savings account with the refund and begin working toward it.
Tax refunds may seem like a Christmas Bonus, but generally, the more you get back the more financial burden the government deems you have. This year make the smart move that’s best for your financial situation. Use your tax return to create long-term financial success for you and your family.