8 Ways to Use Your Tax Refund Wisely
Tax time is right around the corner, and anyone anticipating a refund has probably started thinking about how that refund will be spent. For some people, a tax return is seen as a good excuse to buy a luxury item or take a vacation. For people who are savvy with their personal finances, a tax refund check is a useful tool for getting ahead financially.
The average refund over the last several years has run about $3,000, which is a great way for a first-time investor to get started with saving, or for a seasoned investor to bolster their nest egg. It can also be used to pay off debts or smartly refinance other ones. Here are some ways to get the most out of your tax refund check.
1. Pop in a new CD
A certificate of deposit, or CD, is a savings account that pays interest over a certain term, typically three to 10 years. Longer-term CDs usually pay larger dividends, but the money is tied up over the term. Dividends can be over or around 2 percent in today's market, so an investment of $3,000 into a 60-month CD would yield about $310, or over $650 on a 120-month CD.
CDs are generally low-risk because they are FDIC insured, and the minimum amount required to invest can vary. View our CD rates page to learn about CDs and current rates available.
2. Pad your 401(k)
In an ideal world, everyone would pay the maximum possible amount into their 401(k) account. If you aren't able to save enough to max out your annual 401(k) contributions, your tax return can help you get there. Most workers can contribute up to $20,500 per year, and workers over age 50 can add an additional $6,000 to that amount.
3. Stash more for retirement
Any wage earner making less than $124,000 per year can open an traditional IRA, while those making $144,000 or less can open a Roth IRA. An advantage to IRAs is that taxes have already been paid on the money deposited, so the money isn't taxed again when it is withdrawn. There are pros and cons to opening a Roth IRA, which can have more flexible terms than a traditional IRA. Speak to a financial advisor to determine which is best for you.
4. Improve your saving account
If having money tied up for too long is going to be a problem, a savings account or money market account or interest-bearing checking account might be right for you. The interest rate is much lower than financial products which require longer investments, but your money is more accessible.
5. Dump the debt
Paying down on high-interest credit cards can be one of the biggest money-saving moves you can make. While it is important to have savings, interest on credit card debt may be eating away at any gains being made in other investments. Paying off credit cards is a smart money move, but only as long as you don't celebrate the move by running up the card again.
6. Make a dent in the mortgage
Paying an extra $3,000 on a mortgage over and above normal payments could lead to a substantial savings in interest over the term of the loan. Although it's unlikely and depends on interest rates, putting a chunk of money toward the mortgage could save more over the long term rather than paying off some credit cards. If you don't have any big high-interest credit card debt, and if paying a mortgage off early is one of your financial goals, then putting your tax return into your mortgage is a no-brainer.
If you're planning on buying a home, then it makes sense to drop the tax return into your down payment savings, or to use the money to get that savings started.
7. Cut the car payments
If you have a monthly car payment, you can shorten the term of the loan by applying your tax return to the loan. Another option is to trade in your current car for a new one, and by using the tax return as a down payment, you may be able finance a new car for a shorter term loan. With a hefty down payment, you may also be able to get an excellent interest rate on the new car loan. While automobiles generally aren't considered to be good financial investments, most of us need to have one and are a cost of doing business and living in the world. Having a safe, reliable car can be a good investment toward well-being and stability.
8. Deck the halls
If you're still feeling a financial hangover from last year's holiday spending, turn your tax refund into a Christmas club account for next year. You'll have peace of mind knowing your budget will be on track and you won't have to suffer painful aftereffects at this time next year.