Most individuals look forward to receiving a big tax refund after their file their returns, and many use the money to take the family on vacation or make a big-ticket purchase. While there is nothing wrong with consumers using a windfall to treat themselves, people are being encouraged to consider other ways in which their refund may help them improve their finances in the long-term.
According to MoneyTalksNews, the average refund for last year was $2,803. While putting a large portion or the entirety of a refund toward bills or other goals may not seem as exciting, the overall payoff may be worth it in the end. So before spending the money on a luxury purchase, consider three other areas that can be improved upon first.
Pay down debt
High-interest credit card debt can negatively affect several different areas of a person’s life, including their credit standing, ability to meet daily expenses, savings capability and even their emotional well-being. Therefore, eliminating debt has a number of payoffs, and a refund may help individuals accomplish this goal. If consumers are carrying balances across many accounts, they should focus on the card that imposes the highest interest rate. This account is the one that will tack on the highest interest charges, so making it a priority can help borrowers save more money over the long-term.
If consumers emergency accounts reads zero, using a tax refund to fund a rainy day fund can be a smart way to protect themselves. A sudden disaster, such as a job loss, medical bill or car repair, can quickly derail their finances by forcing them to drain savings, rely on credit or cash in a retirement account early. A separate savings fund devoted solely to these types of emergencies can help individuals ride out sudden expenses and keep their other financial goals intact. If consumers already have a rainy day fund set up, they might then consider using their refund to bolster a traditional savings account.
Plan ahead for retirement
Many Americans are concerned about their retirement readiness, and a once-a-year windfall can help consumers plan accordingly for their post-working years. They might consider opening an IRA, increasing their investments or opening a low-risk savings vehicle, such as a certificate of deposit or money market fund. In addition, planning ahead for medical needs is a crucial aspect of retirement planning, so using the money to boost contributions to a health savings account is also a good idea.