Last year, the average tax refund was $2,782. While it seems exciting to receive such a significant windfall, keep in mind this is money that you overpaid the government during the year. Now that you have that money back, you should put it to work for you. Here is a list of ways you can make the most out of your tax refund.
1. Start an Emergency Fund:
An emergency fund is like a financial safety net for emergencies. There are many situations where you may need to rely on your emergency fund, including job loss or other reduction of income, health emergencies, automobile repair and home repairs. If any of these financial emergencies happen to you, an emergency fund can save you from falling into debt. Many financial planners will advise setting a savings goal for emergency expenses that equals the amount that will cover at least three months of your living expenses. The best type of account for emergency savings is one that you can quickly access. Members CU offers a Regular Savings Account and Money Market Account with easy access to funds when you need them. You can transfer your money directly to your checking account 24/7 via online banking for unexpected bills.
2. Pay Off High-Interest Debt
Put your refund towards paying off your credit card bill. This will save you money in future interest payments. Even if you can’t pay the entire bill, just by putting $1,000 towards the debt will save hundreds in finance charges.
3. Save for Retirement
If you have an emergency fund and your credit cards are paid off, then it would be wise to put your tax refund towards your retirement fund. Consider a Roth IRA (Individual Retirement Account) so that you don’t have to worry about taxes you owe once you decide to retire and withdraw the funds because the withdrawals are tax-free. You have until your tax return deadline to set up and make contributions for the previous tax year. The government sets a limit on how much you can contribute to a Roth. For the 2017 and 2018 tax years, the limit is $5,500, or $6,500 if you’re age 50 or older.
4. Save for College
The cost to attend a four-year college increases every year. According to an analysis conducted by Vanguard, the average annual tuition for public college in 2035 is projected to be $54,070 and $121,078 for a private college. That’s why investing in a 529 plan or Coverdell ESA is a great way to use your tax refund. Contact MCU’s MEMBERS Financial Representative, Richard Davis at 336-748-4800, ext. 1111 or email him at Richard.Davis@cunamutual.com to find out more.
5. Save for Future Planned Expenses:
What expenses should you plan for every month even though you only pay them once or twice a year? Auto insurance, home insurance, property taxes, vacation or holiday spending, and gifts for birthdays or weddings. Calculate how much you will owe in insurance premiums and property taxes, divide it by 12, and automatically have that amount deposited into a savings account every month. Estimate how much you will need to cover vacation, holiday, and gifts for the year. Again, divide that amount by 12 and deposit into your savings every month. Saving to spend is an excellent way to reduce the debt that can build due to overuse of a credit card.