The Top 7 Smartest Ways to Use Your Tax Refund
Easy Strategies to Make the Most of Extra Cash
May 2, 2009
According to an AP poll [1], 57 percent of adults are expecting a tax refund this year, with an average refund of $2,700. For those who expect a refund, especially during the current uncertain economy, they want to use the refund in the smartest way possible. Here are seven ideas to best utilize tax refunds.
Debt Elimination
1. Eliminate a single debt- Individuals that have any single outstanding debt, such as a credit card or the balance on a car or student loan, should use their tax refund to pay off that balance completely, if possible. Doing so will likely result in more fulfillment than just making one extra partial payment on a debt.
2. Make an extra mortgage payment- Since a large payment on a credit card (revolving debt) may disappear if the borrower makes additional charges on the credit card again, a bigger financial impact can be made by making one extra mortgage payment. A single extra mortgage payment could knock several years off of a standard mortgage and result in saving tens of thousands of dollars in interest.
3. Reduce one debt- For refunds that are not large enough to pay off an entire debt, the funds can be used to make a payment towards the smallest debt to eliminate it sooner. If the smallest debt is a credit card, the individual must commit to not making any new purchases on that credit card in order to effectively pay it off sooner. This strategy could help prevent debt from getting out of control.
Emergency Fund
4. Start or increase an emergency fund- For those who do not already have an emergency fund, now is the time to start one. With analysts predicting unemployment rising as high as 10%, the chance of one spouse getting laid off is much greater than in recent years. Starting or increasing an emergency fund can reduce stress even if no emergency occurs, or it can be used to prevent a personal crisis if one does occur. Combining this strategy with Five Tips to Trim Your Budget by $300 per Month could provide further protection for individuals and families.
Investment Options
5. Re-invest in yourself- For workers to remain more competitive than ever in the job market, it is recommended they look for courses or certifications that can help boost their current career or provide more options to pursue a new one. Local community colleges offer many credit and non-credit professional courses including certifications.
6. Open an IRA- For those who do not have any debt, then starting or increasing an IRA account could lead to tax benefits, plus an easier retirement. The stock market is low and is likely to recover within the next few years. Retirement investments now could reap larger rewards in the not too distant future.
Splurge
7. Treat yourself- Everyone needs a break. After being responsible and paying off debt, shoring up finances, and investing in retirement, individuals should do something for themselves. Getting a manicure, taking the kids to a ballgame, or buying something nice for a spouse or one’s self may be well-deserved after a tough year.
Sources:
The AP-GfK Poll conducted by GfK Roper Public Affairs & Media, released on April 10, 2009.
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