Are you getting a tax refund this year? You aren’t alone. According to Internal Revenue Service, nearly 70 percent of taxpayers can expect a refund this year. In even better news, the average refund the IRS anticipates paying out is $2,860.
It’s tempting to want to drop that extra money on the latest gadget, a trip or something else extravagant. Before you do, though, financial experts offer six ways to make your refund dollars really count.
1. Make An Extra Mortgage Or Rent Payment
Okay, making a mortgage or rent payment doesn’t sound very…exciting. However, did you know that making one extra mortgage payment a year can trim a 30-year loan by five to 10 years? For those who are renting, making that extra payment can free up some cash for unexpected expenses that might pop up later in the year.
2. Pay Down Your Debts
If you get a windfall from Uncle Same, start paying down any debt you might owe. Credit card bills, student loans and car loans all typically have high interest rates. By paying down the balance on your debts, you will pay less in interest over the long run. This can save you hundreds or thousands of dollars, depending on how much you pay off now.
3. Max Out Your IRA
Saving for retirement means you’re actually investing in yourself. Sure, it’s years down the road, but why not pay yourself first? Individual Retirement Accounts (IRAs) are often tax-deferred. This means you can invest and not pay taxes on it until you cash it out years later. And, if you have a Roth IRA, distributions are tax-free if they qualify under the tax code. You can invest up to $5,500 or $6,500 depending on your age, according to the IRS. Pay yourself now so you can play more later.
4. Start Or Boost Your Emergency Fund
An emergency fund is money set aside to cover unexpected life events. Things such as illness, job loss, natural disasters, home repairs and unexpected travel are times when having some extra money can come in handy.
Unfortunately, many people do not save enough for an emergency fund. A Bankrate survey showed that only four out of 10 Americans could afford a major unexpected expense.
Using your tax refund to create or boost an emergency fund can give you peace of mind that you’ll have some extra cash in case the unexpected happens—and it usually does.
5. Spend Some On Yourself
Now that you’ve spent most of your tax refund wisely, it’s time to give yourself a little reward. You’ve earned your tax refund and you deserve to treat yourself to something a little special. Just don’t go overboard—you’ve worked hard to firm up your finances!
6. Lower Your Refund For Next Year
It probably sounds crazy, but experts recommend people adjust their withholdings to get a lower refund. That’s right: If you get a big tax refund each year, it means you are significantly overpaying on your taxes with each paycheck. You’re essentially giving the federal government a tax-free loan for 12 months until you file your annual tax return and get that money back as a refund.
By adjusting your withholding status on your W-4 form, your paychecks will be a bit higher, which you can save or spend your money however you wish. It may not seem like much each check, but the money adds up quickly—and it’s better off in your pocket than at the U.S. Treasury.