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Put Your Tax Refund to Good Use
Tax season – the time of year that can either bring a sigh of relief or a bit of trepidation. If you’re among the lucky ones anticipating a tax refund, it’s like getting a surprise bonus in your bank account. Before you start dreaming of splurging, consider how you can use that refund in a way that sets you up for financial success.
Let’s explore smart ways to put your tax refund to good use. Take advantage of high-interest savings and pay off high-interest debt.
Take Advantage of High-Interest Savings Options
One of the most sensible ways to utilize your tax refund is by investing it in high-interest savings accounts. Other interest-bearing accounts, like a certificate of deposit (CD) might be a good option as well. These accounts typically offer higher interest rates than standard savings accounts, allowing your money to grow over time. Your tax refund can kick-start or boost this fund, giving you peace of mind knowing you’re prepared for the unexpected. Here are a few reasons why high-interest savings can be beneficial:
Emergency Fund
Building or bolstering your emergency fund is crucial for financial stability. Life is unpredictable, and having a safety net can help you navigate unexpected expenses without resorting to debt.
Only 47% of American adults would be able to pay with cash or cash equivalent to cover an unexpected $400 emergency expense, according to a nationwide Morning Consult study for the first quarter of 2024.
Short-Term Goals
If you have short-term financial goals like saving for a vacation, home renovation, or a major purchase, high-interest savings can help you reach these goals faster.
Compound Interest
By letting your money earn interest over time, you benefit from compound interest. This means your initial deposit grows, and the interest it earns also earns interest, accelerating your savings growth.
Peace of Mind
Knowing that you have money set aside for emergencies or future goals can provide peace of mind and reduce financial stress.
When choosing a high-interest savings account, compare interest rates, fees, and accessibility to find the best option that suits your needs.
Invest into a Retirement Account
Use your tax refund to fund your future. Consider investing it into a retirement account like an individual retirement account (IRA). By doing so, you may potentially reduce your tax burden while simultaneously planning for retirement. An Individual Retirement Account is a tax-advantaged savings account created by the IRS. At our credit union, we offer two types of retirement accounts: Traditional IRAs and Roth IRAs. We also offer special IRA CDs. An IRA CD invests the funds that would normally go into a mixture of stocks, bonds, and mutual funds into a CD instead at different maturities that offer attractive rates accordingly. This gives you a guaranteed rate of return. Depending on the account you choose to open, you may be able to defer or avoid taxes altogether when you contribute to or withdraw funds.
Check Your Eligibility
Before contributing to or opening an IRA, it’s essential to check your eligibility, especially if you have an employee-sponsored retirement account such as a 401(k) or 403(b). Some individuals may be eligible to deduct contributions to a traditional IRA, depending on their income and participation in employer-sponsored plans. Review your contribution status and understand any constraints that may affect your IRA eligibility. Maxing out contributions to your employer-sponsored plan could impact your ability to deduct IRA contributions or contribute to a Roth IRA, depending on your income level. Consulting with a financial advisor or tax expert can provide valuable insights tailored to your specific circumstances.
Pay Off High-Interest Debt
Another strategic use of your tax refund is to tackle high-interest debt. High-interest debt, such as credit card balances or personal loans, can quickly accumulate and become a financial burden. Plus, tackling debt can boost your credit score, opening doors to better financial opportunities down the road. It’s not just about saving on interest; it’s about investing in your financial well-being.
Here’s how prioritizing debt repayment can be a smart move:
Save on Interest
High-interest debt typically comes with hefty interest charges, which can add up over time. By paying off this debt sooner rather than later, you save money on interest payments.
Let’s break it down with an example: Imagine you have a credit card balance of $3,000 with a hefty interest rate of 27%. If you only make the minimum required payment of $97.50 each month, it’s going to take you a whopping 240 months, which is 20 years, just to clear that $3,000 debt.
But here’s the kicker – during that time, you’ll end up paying a staggering $3,044.57 in interest alone, bringing your total payments to a jaw-dropping $6,044.57. These figures are based on Bankrate.com’s minimum credit card payment calculator and highlight just how much of a financial drain high-interest debt can be if not managed strategically.
Improve Your Credit Score
Reducing your debt and making timely payments can positively impact your credit score. A higher credit score can lead to better loan terms, lower interest rates, and improved financial opportunities in the future.
Financial Freedom
Eliminating debt provides a sense of financial freedom and flexibility. You can redirect the money that would have gone toward debt payments toward savings, investments, or other financial goals.
Reduce Stress
Debt can be a major source of stress. By paying it off, you alleviate financial pressure and create a healthier relationship with your finances.
When prioritizing debt repayment, focus on high-interest debts first to maximize savings. Consider creating a debt repayment plan or using strategies like the debt avalanche or debt snowball method to accelerate your progress.
Make Your Tax Refund Work for You
Whatever your financial goals and dreams may be, harnessing the power of your tax refund can propel you towards financial empowerment. Whether you are focused on paying off burdensome high-interest debt, diligently investing in your future through retirement accounts, or seizing opportunities with high-yield savings options, every dollar you allocate wisely brings you closer to your aspirations. Take a moment to reflect on your priorities, envision the future you desire, and craft a plan that resonates with your values and ambitions. By making deliberate choices today, you pave the way for a brighter tomorrow, and watch how your tax refund can be more than just a surprise windfall and more of an ongoing plan for your financial success.
Too Long; Didn’t Read (TL;DR)
Take Advantage of High-Interest Savings Options – Let your money make money while building an emergency (or vacation) fund.
Invest into a Retirement Account – Let your tax return fund your future. The best time to start saving for retirement is yesterday.
Pay Off High-Interest Debt – If you have credit card debt, you’re racking up more interest owed than you would earn in a savings account. By paying it down now, you’ll save more and make more in the future.
