Expecting a tax refund? How will you make the most it?
If 2016 repeats taxpayers will likely park most of their refund in a savings account this year. The National Retail Federation or NRF found that nearly 50% of Americans planned to set aside their IRS checks in 2016.
It marked the highest percentage of savers in the survey’s history and possibly speaks to the fact that many Americans would not be able to cover a sudden rainy day expense. The Federal Reserve’s latest Economic Well Being study found that close to half (or 46%) of Americans would not be able to produce $400 in cash in an emergency.
While saving topped the list, the NRF also learned that more than a third of taxpayers planned to pay down debt with their refunds. Twenty two percent used the funds for everyday expenses like food and gas.
With the average tax refund topping $3,100, that’s a sizeable windfall that can really move the financial needle. Not sure if you should save or pay off debt? Invest the money or go on a shopping spree? Here are four routes you can take, depending on your financial health.
Today the average household with credit card debt is carrying a balance of $15,675, according to survey by Bankrate.com. If you’re in that boat, consider placing most, if not all, of your tax refund towards high interest credit card debt.
If your student loans are what are keeping you up at night, that may be the next best place to pay it down. The interest rate may not be that high, but if the balance is big and you’re not sure when you’ll ever be debt-free, placing any and all cash windfalls towards the loan principal can help reduce the burden.
If debt isn’t your problem, but you lack enough savings to cover a rainy day expense, do as nearly most taxpayers do and bulk up your emergency fund.
The standard advice is to have between six and nine months of expenses reserved in a savings account, but having even just a few thousand dollars set aside for the unexpected (e.g. car breaks down, a surprise medical bill, etc.) can sometimes be enough to keep your cash flow in the black.
How prepared are you for retirement? If you think you need to play catch-up, consider allocating your tax refund towards a retirement account.
If your workplace 401(k) offers a match, start there. That offers the most bang for your buck, since you’ll earn some free money for your contribution. Plus, your contribution will be tax-deductible up to $18,000 this year. If you don’t have a 401(k) or don’t feel it’s the best place to park your money, think about investing in a traditional or Roth IRA with your tax refund to build out your retirement savings portfolio.
Have debt and savings under control? Don’t feel you need to play retirement catch up? Then have some fun. According to the same NRF study, 11.4% of taxpayers planned to book a vacation with their refund last year. Another 9.2% looked forward to making a big-ticket purchase like a TV or new car, and 8.3% were headed to the spa, salon or a fun night out, as away to treat themselves.
Last but not least, giving back is another way to make the most of your refund. If one of your goals this year is to contribute to a charity or a number of organizations, using your tax refund to do so now can be a really smart way to go about it.
Many of us procrastinate and leave charitable giving to the end of the year when we’ve used up most of our funds – and end up not giving as much or at all. We may also feel rushed to decide where to donate in December. Now, in the spring you can spend more time researching non-profits. You can read reviews and find ratings at GuideStar.org and CharityNavigator.org.
From the Mint team: Take the first step to finding the right IRA for you by visiting Mint’s IRA information page.
Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.