Smart Things to do (and not do) with Your Tax Refund
For the 2017 tax filing year, the Internal Revenue Service reports that seven in 10 Americans will be getting a refund; with the average amount being close to $2,900. Rather than letting those dollars disappear into your normal spending routine or spent on a frivolous expense, it’s important to be financially savvy. Here are some smart money tips - as well as some big no-no’s:
First, the do’s:
- Pay down high interest loans and lines of credit. With average annual interest rates for credit cards and personal loans on the rise, paying off that credit card before making other investment decisions makes good sense.
- Fund your retirement account. About 30 percent of all working Americans have no money invested for their retirement. If you are one of them, seriously consider making a contribution to an IRA right away.
- Get higher rates of return with certificates. Share certificates offer a higher-yielding, but still safe way to invest money for a set period of time, ranging typically from three months to five years. And unlike investments which carry risks, money put into a certificates at federally insured credit unions is generally insured for up to $250,000 through the National Credit Union Administration. Is a certificate option is right for you? Learn more about the competitive rate certificates offered through Nusenda Credit Union.
- Invest it. Instead of just working for money, let money work for you. If you did your research and chose to invest one lump sum of $1,500 in the stock market, you’d have $53,924 in 30 years (at the market average of 12 percent interest). Schedule a complimentary consultation to discuss your options. We can help you determine what makes the most sense for your financial situation and goals.
- Opening an emergency account. Most Americans don't have money set aside for those financial crises that seem to occur when there’s no cash in the coffer. A large tax refund is a great start an emergency account; ideally your nest egg should eventually be between three to six months’ worth of essential living expenses. You can open a savings account online, stop by a branch, or contact us to make an appointment.
Now, for the don’ts. If you receive a significant return, you may be tempted to splurge on something you wouldn’t normally be able to do. Avoid the following:
- Spending frivolously: It may be tempting to get that high-ticket item you’ve been eyeing all year. But as fun as it may be, that kind of spending doesn’t improve your quality of life. A small treat is certainly acceptable, but think about what smart choices look like – both now and for your future.
- Buying a new car: This time of year, you’ll see signs hanging on dealerships declaring that your tax return can become a down payment on a new set of wheels. But keep in mind that if paying your normal expenses is already a challenge, having a new monthly car payment isn’t going to make it easier. If you need transportation, consider getting your current car repaired or schedule any suggested maintenance to keep it running smooth. Or, use the refund as a seed fund for a savings account, so you can buy a car outright with cash.
- Continuing the debt cycle: While paying off credit card or other debt is smart, not having an emergency cushion for the future means you’ll be racking up debt again before you know it. Instead, begin an emergency fund, then stop using your credit cards. Don’t even carry them with you – some people have been known to put their cards “on ice” by freezing them in bags of water so they’re harder to access.
- Spending it on the kids: Getting some necessities like clothes for fast-growing children is OK, but showing restraint when it comes to big-ticket items is the smart move. Not only will making large purchases derail your goals, it could set up unreasonable expectations within your family. Showing your children the value of money and the importance of saving beats a spontaneous gift every time.
While there are lots of ways to smartly use a lump-sum amount of cash, remember that instead of planning for a refund, it's best to come out even. A tax refund is an interest-free loan to the government, and money that is not in your pocket every month. If you have been getting a refund back each year, consider changing your withholding exemptions so less tax is withheld from each paycheck. The IRS has a withholding calculator that will help you determine the amount you should claim on your taxes. If you see bigger paychecks, stashing the difference in a savings account means you’ll be earning interest, instead of giving Uncle Sam an interest-free loan.