It has been reported that the average tax refund is $3000. While many people see that refund as fun money, there are some great things you can do to make your tax refund work for you. Bob Wamhoff, President of Wamhoff Financial Planning and Accounting, provides the following tips:
1. Pay down your high interest debt, specifically credit card debt:
- This is the first step in any kind of savings plan, and will get you on stronger financial footing.
- It is important for all taxpayers, but especially those with credit card debt, to work with your tax professional now to ensure you are not over-withholding from your paycheck (something 75% of taxpayers do).
- The extra money you keep in your check could be used to keep your debt in check throughout the year.
2. Add to your retirement savings
- If you are putting the money into a Roth IRA, you can contribute the entire amount into the account in one lump sum.
- If you are putting the money into your 401k, you would want to put the $3000 into a money market account and bump your monthly contributions from your payroll by $250 per month. This helps so that your cash flow isn’t impaired by the higher deduction.
3. Start an emergency savings account
- Most experts say you need at least 9-12 months of income in an emergency fund. Your tax refund could get you started.
- The best type of savings account for this purpose is a traditional Money Market. While the rate of return isn’t the highest, there is no risk involved.
4. Refinance your home
- Interest rates remain low, so it’s still a good time to refinance.
- Use your tax refund towards to closing cost and shorten the term of your mortgage to 15-20 years on the refi.
5. Save for a splurge
- If you are going to save for a large expense, such as an extravagant vacation or a toy you’ve always wanted, your tax refund can get you started.
- Think about when you’re planning to make this purchase, or incur this expense. If you’re saving for something that will happen 12-18 months from now, a Money Market account is your best bet. Even in low risk investments, the timeline is too short and you could very well go backwards. For any type of investment, you need a bigger horizon.
- If the expense will happen 7-10 years from now, you may have more options for investing that will provide a greater chance of growth. A professional can help you with the right investment.