It’s the time of the year where the most eager tax filers are starting to find their tax refund has been delivered to their mailbox or directly deposited to their checking account. The average federal refund has been about $3000 for the last two years, according to TurboTax. That amount of money is sure to leave a lot of people with scorched pockets across the country and retailers like Best Buy are sure to reap the benefits as people upgrade to the newest, thinnest LCD television available. Guess what folks, by Christmas that new television will be replaced by one that will actually make you breakfast and clean up the mess. Let’s examine some smarter uses for your tax refund shall we?
Adjust Your Tax Withholding
Some taxpayers like the idea of a tax refund, if they make enough to live comfortably during the year; a tax refund is a welcome surprise. Others don’t like the idea of giving the US government what is essentially an interest free loan for 12 months. If you’re the latter of the two types, use this calculator to adjust your tax withholding to increase your take-home pay. If you received the average refund of $3,000, you could increase your monthly take-home pay by about $250!
Prepay Your Mortgage
Applying your refund to your mortgage principal won’t reduce your monthly payment, but doing this consistently over time can drastically reduce the number of years you have to pay on it. Take this scenario for example: You have a balance of $150,000 on a 30 year fixed mortgage at an interest rate of 3.25%. If you applied an extra $250.00 per month to your mortgage principal, you would pay your loan off in just 18.5 years (222 months), instead of 30 years (360 months). This move would save you over $35,000 in interest over the life of your loan.
Pay Off a Credit Card
A recent survey by the Federal Reserve Bank revealed there are 609.8 million credit cards held by US consumers. 71% of the population reports that they have one, and the average person has between three and four. The average household has $15,956 in credit card debt, sometimes spread over multiple cards. One popular and wise use of a tax refund is to eliminate the balance on one of your credit cards, freeing yourself of the burden of that payment. Tip: To make this strategy really work for you, put your refund towards the card with the highest interest rate, then apply the monthly payment you’d normally make on that card to another credit card.
Pay Down Student Loans
Did you know that nearly 60% of the 20 million Americans who attend college every year borrow annually to help cover the costs? There are currently approximately 37 million student loan borrowers with outstanding loans, and the under 30 age group has the most borrowers at 14 million. The average income for someone in the under 30 age group with a bachelor’s degree is $45,000. If you’re in this age group, or even if you’re not, and you have student loan debt consider applying your tax refund to your student loans. The sooner you’re free and clear of student loans, the better. This outstanding debt can affect your ability to take on other types of consumer debt such as auto loans or mortgages.
Contribute (up to $5000) to an IRA
You can contribute up to $5,000 to an IRA (or $6,000 if you’re age 50 and up). If you’re single and your modified adjusted gross income is less than $125,000 (or $183,000 or less if you’re married and filing jointly), then you can contribute to a Roth IRA, which lets you withdraw the money tax-free upon retirement. If you earn too much for a Roth, contribute it to a traditional IRA, and convert it to a Roth later.
Enjoy these tips? Check back next week for more!