Are you expecting an income tax refund? You are not alone. In 2016, the average tax amount was $2,782 and the IRS issued over $302 billion in refunds. Use your refund wisely! Consider the following ideas:
¨ Save for Emergencies- Aim to set aside at least 3 to 6 months expenses in a money market fund or bank account. This is your “fall back fund” in the event of unemployment or unanticipated expenses.
¨ Pay Down Debt- The more debt you repay, the less interest you will owe. Paying down an 18% credit card balance is like earning 18% on an investment- plus it is a guaranteed return and tax-free!
¨ Start an IRA- A one-time $3,000 tax refund invested in an IRA containing a stock index mutual fund with an average 8% return will be worth almost $31,000 in 30 years. A $3,000 tax refund invested every year for 30 years will be worth over $370,000.
¨ Invest in Mutual Funds- Most mutual funds allow investors to open an account with $3,000 or less. Choose a fund with good historical performance, low expenses, and an objective that matches your investment goals.
¨ Improve Your Skills- Use your refund to take courses or attend conferences that will make you a more skilled and valuable employee. Economists refer to this as “building your human capital.”
¨ Review Your Tax Withholding- A large refund indicates that your tax withholding is incorrect (over-withholding). Hire an accountant or financial planner to review your finances or use the online IRS Withholding