You made it through another tax season. Now you can forget all about deductions and tax credits and focus on what really matters: how to spend that refund.
After wrestling with a tax code more than twice the size of Stephen King’s “It,” you might be tempted to reward yourself with some retail therapy. But before you go on a shopping spree, why not use your tax refund to improve your financial situation?
The average refund exceeds $3,000—that’s the biggest chunk of disposable income most people see all year. Eight in 10 Americans plan on using their refund to save, invest or pay down debt. Here are seven ways to spend your tax refund wisely:
1. Ward off disaster.
When you’re living paycheck to paycheck, one crisis such as a car breakdown or medical expense can send your finances into a downward spiral. Yet most Americans are more prepared for the zombie apocalypse than they are for a $500 emergency. Experts recommend stashing away three to six months’ worth of income for a rainy day. Your tax refund is enough to kickstart an emergency fund and cushion you against the unexpected.
2. Unload some debt.
Paying down a credit card is one of the smartest things you can do with your tax refund. A $3,000 balance on a credit card with a 15 percent Annual Percentage Rate can cost you up to $450 a year in interest. If you only make the minimum payment, it’ll take 16 years to pay off the debt. During that time, you’ll pay an additional $3,641 in interest. Pay it off now and you’ll more than double the value of your tax return.
3. Set aside some relaxation.
If you don’t need the money right now, why not beef up your retirement savings? Even if you already have a 401(k) through work, you can supplement it with an Individual Retirement Account (IRA). Investing your $3,000 at 6 percent compound interest would net you an extra $14,000 over the next 30 years.
4. Make a down payment.
What’s your next big dream? Buying a house? A car? The bigger your down payment, the better the deal you’ll get on a loan. Your tax refund can shave months or even years off the time it takes to save up your down payment. In the meantime, it’ll be earning interest in your savings account.
5. Grow your wealth.
Maybe you’re in a good place right now. Your credit cards are paid off, and you’ve got your emergency and retirement funds squared away. Time to put your extra money to work for you. Our investment professionals can help you invest your tax refund affordably and efficiently.
6. Update your home.
If you’re a homeowner, your tax return can improve your quality of life while boosting your home’s value. A bathroom remodel, for example, can typically recoup 80 percent to 90 percent of its costs in home value. Small-scale kitchen upgrades often boast an 85 percent return on investment. Trulia has identified the top four most lucrative home renovations for under $5,000.
7. Start a business.
If you dream of self-employment or just want to earn some extra income on the side, use your tax refund as seed money for launching your own business. Think it’s not enough? Entrepreneur magazine has a list of 23 different careers you can launch for under $2,000.
Need help saving or investing your tax refund? Contact OCCU to open an account today!