5 ways to use your tax refund strategically
Tax season is here, which means millions of American taxpayers could soon receive a substantial financial windfall in the form of a tax refund check. Last year, the average refund was $2,873, according to the Internal Revenue Service (IRS).
American taxpayers generally use their tax refund to improve their finances, according to a survey by the university of chicago. In 2021, consumers planned to increase their savings (46%), cover their living expenses (35%) or pay off their debts (32%) with their tax return.
While many Americans use the extra cash from their tax refund to build long-term wealth, others decide to splurge on something fun or fund a major purchase, the survey finds. . If you’re wondering how to use your tax refund wisely, consider the following strategies:
- Pay off high interest credit card debt
- Boost your retirement nest egg
- Pay off your student loan balance
- Invest in the stock market
- Create an emergency fund
Keep reading to learn more about these options in the sections below. And visit Credible to compare a wide variety of financial products, such as debt consolidation loans and high-yield savings accounts.
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1. Pay off high-interest credit card debt
If your revolving credit balance has increased over the past year, you might consider using your tax refund check to pay off your credit cards. Since credit card interest increases daily, you can save hundreds or thousands of dollars in interest charges over time by paying off credit card debt with your tax refund.
Another way to get rid of credit card debt is to take out a debt consolidation loan. This is a flat-rate, low-interest personal loan that you repay in fixed monthly installments. You can compare debt consolidation loan rates from multiple lenders at once on Credible and find the lowest possible rate for your financial situation.
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2. Boost your retirement nest egg
The median retirement savings balance is $93,000, well below the amount that experts say is needed to retire, according to a Transamerica survey. One way to shore up your retirement fund is to add your tax refund check to a Roth or traditional IRA (individual retirement account).
Americans under age 50 can contribute up to $6,000 per year to a traditional or Roth IRA, although the maximum annual contribution gradually decreases at certain income levels. according to the tax authorities. Consumers age 50 or older can contribute $7,000 per year, depending on their income.
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3. Pay off your student loan balance
Monthly payments and interest charges on federal student loans are paused until May 1, 2022. This means borrowers who choose to continue making payments on their college debt can reduce their principal balance without paying interest.
You can maximize this current federal benefit by using your tax refund check to pay off the principal balance of your student loans. Or you can also save tax refund money to use when student loan repayments resume in a few months.
Student borrowers may also consider refinancing while interest rates are still near their lowest levels. Keep in mind that refinancing federal student loan debt into a private student loan will disqualify you from income-driven repayment (IDR) plans and some student loan forgiveness programs. You can compare student loan refinance rates on Credible to decide if this debt repayment method is right for you.
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4. Invest in the stock market
If you have strong savings and no debt to repay, you might consider invest your tax return in the stock market. Although the stock market is subject to short-term fluctuations, it can offer a better long-term return on investment than savings accounts or traditional bonds.
To mitigate your risk, you might consider putting your money in an index fund that tracks the stock market, such as an S&P 500 index fund. This can diversify your investment, which protects your money more than if you just invested in a few individual stocks. .
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5. Create an emergency fund
Consumers are recommended to have approximately three to six months of spending saved in an emergency fund. Having a solid emergency savings can help you avoid getting into debt when you’re faced with unexpected expenses like car repairs or surprise medical bills.
This year, you could start your emergency savings by putting your tax refund in a high-yield savings account. These accounts have higher savings rates than traditional bank accounts, although they have a lower return on investment than stocks. But unlike equity investments, you can quickly and penalty-free access your money in a high-yield savings account if you need it in an emergency.
You can compare high yield savings account rates from multiple banks at once on Credible to find the best possible deal for your financial needs. Shopping is free and does not affect your credit score.
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