For 2017, the average tax refund is expected to be $2,763. For a lot of people, this is the most amount of money they’ll have at one time during the whole year. Unfortunately, most folks squander the money and a month after receiving it, they couldn’t tell you what they did with their refund. Thoughtful action on your part can make a significant difference in your financial picture. Here are my six best recommendations:
- Enter the lottery…but only this one. SaveYourRefund.com encourages you to save at least a portion of your refund and our government is here to help. Government Form 8888 allows you to direct all or a portion of your refund directly into your savings, investment, IRA or other accounts including 529 college savings account…no waiting on your refund check and then having to make your own deposit. Follow Save Your Refund’s easy step-by-step process to enter the lotto drawing which includes one-hundred $100 prizes and a $25,000 grand prize (for folks who add a photo). Visit their website for complete details.
- Boost your investment returns. Most workers are not fully investing in their company’s matching 401k plan. Here’s an opportunity to boost your returns for your retirement. If, for example, you invested your $2,763 refund in your company 401k plan and your company matched it 50%, in thirty years that investment would grow to over $54,000 at 9% (average return for S&P 500 Stock Index). If you made this an annual habit, your investment account would grow to over $600,000! If you’re already maxing out your company’s matching plan, consider funding a traditional (deductible) IRA or a ROTH IRA.
- Pay off a credit card. Credit card debt is typically easy money to get but expensive to own and difficult to pay off. Look over all of your credit card debts and pick either the one with the highest interest rate or one where your refund will fully pay it off. If you choose the latter approach, use the payment you were making on that card to accelerate the pay-off on the highest interest rate card you have remaining. Research suggests the average interest rate is above 16% and the average credit card debt per household is just over $16,000. Per CreditCard.com, a $4,717 balance would take 10 years to pay off paying the minimum balance at 15% for a total of $22,869! That’s $18,155 in interest for a $4,717 loan! OUCH!
- Invest in a 529 plan. The best gift you can give a young person is the best education for which they can qualify. The best way, by far, to prefund a college education is through a 529 college savings plan. In Alabama, you receive an added incentive in the form of a tax deduction on your state income tax return. A $10,000 contribution will save you $500. If you invested that $2,763 tax refund for your one-year-old every year, she’d have over $100,000 by the time she heads off to college.
- Reduce financial stress. According to MarketWatch, most Americans have less than $1,000 in savings. Believe me when I say, Murphy’s Law is alive and well. There are few things as stressful as having a financial crisis come up and having no money available to deal with it. This money is best kept in a separate savings account earmarked for the unexpected. Use your tax refund to act as ‘seed money’ for the account and then set up an auto-deposit of 2% to 4% from each paycheck.
- Invest in YOU. You’re the Golden Goose. Is there a course or degree that could propel you to the next level in your career? Often companies have programs to provide financial assistance to further your education in areas that make you more valuable to them. Achievement in this area often can move you to a new financial trajectory.
Don’t squander your tax refund. Commit to do something meaningful and a year from now; five years from now; twenty years from now, know that your decision today set you on a course that significantly impacted your life. Vincent Van Gogh said, “Great things are done by a series of small things brought together”.