If you’re one of the eight out of ten Americans who will get a refund for the 2016 tax year, chances are you’ve already received your refund by now. And, naturally, when a big pile of cash lands in your lap, it’s natural to want to do something fun with it. And perhaps you can- after you’ve put the majority of the money where you need it the most.
Here are some smart ways to use your tax refund.
Save it for a rainy day
What would you do if you unexpectedly got hit with a $1,000 medical bill or car repair? It is estimated that seven out of ten Americans have less than $1,000 in savings. Experts suggest keeping six months’ worth of living expenses in an easy-to-access savings account at a financial institution such as Sandia Area. Setting aside an emergency fund can help you avoid going into debt when unexpected bills come up.
But if you’re carrying a lot of debt, think about starting a mini emergency fund of $1,000 for now so you can pay off more of what you owe.
Pay down debt
If unmanaged, credit card debt can get out of hand because it can exert downward pressure on your credit score and because the typical account has a relatively high interest.
Putting your tax refund toward high interest rate credit card debt can have an immediate impact. Your credit score may go up when you reduce your balances. And if you can manage to pay off one card entirely, you’ll be eliminating a monthly payment, which in turn can free up some funds for you to put towards other debt or to contribute to a savings goal.
If you find you still need more help tackling your credit card debt, rest assured you can turn to your friends at Sandia Area. You can transfer your high-rate credit card debt to one of our lower-interest credit cards. Most financial institutions charge a fee to transfer your balance,but we don’t! Plus, there’s no annual fee!
Contribute to a retirement fund
If you’re like most people, your retirement savings could use a boost. Consider funneling that refund into your 401(k) plan by increasing your contributions, or put it in an Individual Retirement Account or IRA. Putting money into an IRA will reduce your taxable income for the year the contribution is made, making a refund next year more likely. Money put into a Roth IRA, on the other hand, won’t reduce your tax bill in the short term, but both contributions and investment gains can be withdrawn tax-free in retirement.
Change your withholdings
Of course, a big tax refund means you’ve been making an interest-free loan to Uncle Sam all year. Adjusting the amount of taxes withheld from your pay will put money in your wallet sooner. But don’t forget to do something smart with the extra cash- like increasing your retirement contributions or paying down debts a little faster.
Once you have used a majority of your refund responsibly, don’t forget to set some aside and treat yourself to something nice.
« Return to "Articles of Interest"