Most Americans are letting out a sigh of relief as another tax season has come to an end. While we anxiously wait for our tax refunds, you may be thinking of the thousands of ways to spend it. Before the check arrives consider these options to putting this new found money to financial good use.
Leading up to the tax deadline, a number of studies were preformed to get a sense of what Americans plan to do with their refund. The National Endowment for Financial Education listed that forty-four percent of those who withhold extra cash from their paychecks plan to use the refund to save.
While this is encouraging to see, back in March a Capital One poll reported that 37 percent plan to spend the refund on things such as everyday expenses (23%), clothes (11%) and other luxury purchases.
Before you splurge your tax refund, which is averaging $3,129 (source: IRS) on that brand-new flat-screen TV or an extravagant vacation, try placing the money in one of these options.
Lower Your Debt
Whether its paying off credit cards or paying down loans: Easily the most important thing you could do with your tax return. Eliminating debts such as balances on high-interest credit cards or making an extra payment on your mortgage or car loan could save you hundreds of dollars in interest.
By paying off a credit card that is charging you 20% interest, will not only remove a monthly payment, it will also help you improve your credit rating.
Saving for Retirement vs. Creating an Emergency Fund
Depending who you talk to, you’ll get a different response, but in my opinion the answer depends on what your current life situation is.
No matter how old you are or where you’re living having a set amount of cash on reserve can protect your from unexpected circumstances. If you already have 3 – 6 months of savings to cover the essentials, than its time to think about your future and invest in your retirement.
If you’re serious in savings for the future, the safest option is to open a Traditional or Roth IRA. You can invest up to $5,000 or $6,000 if you are over the age of 50. This money will also grow tax-free.
Invest in College – 529 Plan Contributions
With college tuition continuing to skyrocket into unimaginable costs; starting a 529 plan is a great way to protect yourself and children from having to take our loans.
The great thing about these types of college savings plans, is the sooner your start the less you need to invest. Your investment will compound and begin to work for you. 529 plans are also a great option because they be used tax-free when applied to college expenses. If you consider this approach, be sure to research your states 529 plan and specifically look for protection terms and if they have enough money to cover all of their members.
Don’t forget to have fun – splurge a little: While taking the necessary steps to help your financial future is the best decision you can make, also remember to have fun some fun with your tax-refund.
Maybe it’s taking an extra day on that vacation you have planned, or adding a few more inches to that new TV that you had already saved for. In either case, by taking a little cash and having fun with it, you will feel more empowered to apply your tax refunds to financial motives in the future.