More than 70% of US taxpayers are going to receive a tax refund in 2017. Yes you’re loaning the government a 0% loan whenever you overpay your taxes but some people are okay with that knowing they’re going to get a big chunk of change back during tax season. When you do receive a refund, here are some ways to make your refund do double-duty.
Pay down your debt
When you pay down any debt balances, especially any loans or credit cards with a high interest rate, you’re doing a couple of things to improve your finances. Not only are you working towards paying it off early, you are also saving on interest charges and improving your overall credit score!
Increase your savings
If you’re lacking in the savings department, this is a great opportunity to allow you to catch up. Whether you fund a retirement account for yourself, bulk up your emergency savings account, or starting an education fund for your children. A financial concept known as the Rule of 72 can give you a rough estimate of how long it will take your investment to double. Simply divide ’72’ by your estimated average annual rate of return and that gives you an idea of how many years it will take your investment to double.
Split your refund
Not sure whether you should pay off debt or bump your savings? This is a common dilemma among many and the answer depends on what is important to you and what your priorities are. Is paying off debt going to free up some of you cash flow so you have extra funds every month? Do you have virtually no savings and would have to pay an emergency with a credit card? It’s important to have some sort of emergency savings set to the side so before you decide to pay off debt, set aside at least $1,000. Thereafter, tackle any debt that has an interest rate of 6% or more.
Prepare for next year
Indeed it is nice receiving a large tax refund every year but if you’re mindful about your money, you can make that extra money work harder for you throughout the year. Use the IRS Withholding Calculator to determine what the claim on your W-4. You already know what you’re budgeting for with your net income and after you make an adjustment, put away that extra increase towards savings or your debt payoff goals.
Disclaimer: I am a CERTIFIED FINANCIAL PLANNER TM (CFP®), but I am not your CFP® or financial advisor. The information in this article is for general informational and entertainment purposes only and does not constitute financial advice. This article does not create a financial planner-client relationship. The author is not liable for any losses or damages related to actions or failure to act related to the content in this article. If you need specific financial advice, consult with a licensed financial advisor, CFP®, or tax professional who can tailor advice regarding your specific circumstances. Additionally, sometimes I use affiliate links to support my website. This means I may earn a small commission, which is no additional cost to you, for referring and discussing products and services that I personally use, or have used and trust. Thanks for your support!