We’re in the home stretch of tax season, with April 15th only a few weeks away. Have you filed your taxes yet? Despite all the build-up over the dreaded tax-filing day, a majority of Americans will receive a refund. How will you spend yours?
The IRS estimates that about seventy-five percent of filers will have money coming back. It’s tempting to spend a tax refund on something you really want, like a night out, a vacation or an HDTV with all the bells and whistles. Before you do, think about spending it wisely. Here are some suggestions:
Pay down credit card debt. One of the single most important investments you can make is erasing debt, especially credit card debt. When you don’t pay off your bill each month, interest accrues on the balance AND on each new purchase. So if you use a refund to pay down credit card debt, you are actually saving yourself money now, and into the future. Whether its $20 or $200 in finance charges, it adds up. In some cases, the money you save by paying down the debt could even exceed the amount of your original refund. That’s a wise investment.
Save for a rainy day. Do you have any money set aside for an emergency? Most financial experts recommend that you set aside about six months of living expenses in an interest-bearing account. It can take a long time to save, especially if little emergencies keep popping up, but don’t get discouraged! If you don’t have a rainy-day fund or have dipped into your savings, getting a refund is a great opportunity to build or rebuild it.
There’s no place like home. Have you thought about purchasing or refinancing a home but couldn’t afford the down payment, closing or appraisal costs? Are you going to need a new roof or water heater? Would new appliances help reduce energy and utility costs? Putting your tax refund toward any of these things could save you a significant amount of money each month. These types of investments will also add to the value and the comfort of your home.
Others in need. In these challenging times, it becomes increasingly difficult to place your circumstances into perspective. You may have experienced financial challenges, but there are others with even greater needs. Consider donating your tax refund to a homeless shelter, a food pantry …or even giving a gift to a family member who needs help getting back on their feet.
Lessons for children. A tax refund provides an opportunity to teach children about taxes and savings. Share your tax experience with your children. Help them understand the difference between pre-tax and after-tax income, then use the refund to open a savings account for them. Financial literacy is critically important for youth and the lessons learned can stay with them for life.
Put it out of reach of the “Tax Man.” It’s possible that the tight economy of the last few years has made it hard for you to save for retirement or your child’s education. Consider putting some of your tax refund into a tax-advantaged account, such as an IRA or 529 College Savings Plan. These savings options have specific guidelines for withdrawal, but the money you put in can earn interest and it’s tax free when you are ready to withdraw the funds.
Your financial adviser or local banker can go through all of these options with you, including the latest interest rates for deposits or home loans, to help maximize your tax refund. OneUnited Bank, for instance, offers interest rates on savings accounts greater than the national average and offers assistance on closing costs for home loans.
Of course, you might also decide that you need that night out, vacation or the latest big-screen TV, which is okay too! Just don’t use the refund as an excuse to spend beyond your means.
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Please be advised that in accordance with IRS Circular 230, any tax advice contained herein is not intended or written to be used, and cannot be used by any recipient for avoidance of penalties under federal tax laws.
