Smart Uses for Your Tax Refund

Are you expecting an income tax refund? You are not alone. In 2016, the average tax refundamount 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 Calculator.