Most years, more than three out of four Americans who file a tax return get some money back. Last year, the average refund was $2,800. If you’re in line for a refund, I know you’re already thinking about all the things you can do with that money! And in many cases, you’ve already spent it in your head many times over.
Take a trip? Buy some furniture or new toys? It’s fun and tempting to splurge on something you or your family wants. And while I recommend spending a portion on some kind of treat, I encourage restraint so that this windfall (of your money) can go directly to other needs.
One of my favorite quotes of all time is from Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Because needs vary from household to household, here are seven smart tips in no particular order that can better position you financially. They all will save you much more than the amount of your refund invested in them.
1. Fund the emergency account
. If you don’t have one, start one. If you have one, add to it. I cannot overstate how important it is to cushion yourself from the unexpected but inevitable car or home repair, healthcare expense, or whatever life throws at you. For peace of mind, it’s worth its weight in gold.
2. Make an extra mortgage payment. I’m always fascinated at how much one extra payment per year can save you over the life of a 30-year mortgage. Do the math on a mortgage calculator like this one from Bankrate - ( http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
). It may astound you. What I love most about this idea is how much this could save you. It literally could save you thousands over the life of your loan.
3. Start or add to an IRA
. If you had one of these before today, the refund we’re talking about would most likely have been larger. But that’s only one reason to contribute to an individual retirement account. The money in these accounts grows tax-free until you turn 70 ½. There is no loan for retirement so make sure to save as much as you can!
4. Put it toward your car. Like the mortgage example, you could make an extra car payment (or more) and slash the amount of interest you pay the bank before the vehicle becomes yours ( http://www.bankrate.com/calculators/auto/early-payment-payoff-calculator.aspx
). But if it needs a tune-up or repairs, do yourself a favor and get it done now. Preventive car repairs are almost always less expensive than emergency fixes.
5. Pay down a credit card
. If you’re thinking you should put your refund into savings, I applaud you. But, in today’s interest rate climate, you should consider using a portion of your refund to pay down some debt, especially high-interest credit cards. If you can pay off all your debt with the refund, do it! Then use the money you were using each month to pay off the debt and grow your savings.
6. Get an energy audit
. This probably isn’t the first thing that comes to mind when thinking about how to spend your refund. But maybe it should be. For a little money upfront now, you can learn how to save serious money and be more comfortable for years to come. (http://www.energystar.gov/?c=home_improvement.hm
7. Get it fixed
. It may be the peeling paint on your house or just the shots you know your dog needs. Whatever nagging, no-fun expense is next on your list, throw your tax refund at it and you’ll likely feel better.
Do any of these and your financial picture will be better because of it. And in many cases, your stress level will decrease with added peace of mind. With debt and savings, the less you have of the former, the more you can build the latter. Invest your tax refund in whichever side of the ledger makes the most sense for your situation and you can actually improve your quality of life. It’s worth it. So splurge a little, invest the rest in a better life.
Final thought: If you’re getting anything close to the $2,800 average American refund, reassess your W-4 and change it so that more of that money goes into your paycheck and not an interest-free loan to Uncle Sam. Then we can talk about being diligent in making that extra money work for you year-round!
Kat's Money Corner is posted on Dollars Sense every Tuesday. Kat Hnatyshyn, when not blogging or caring for her little one, is a manager with CommunityAmerica Credit Union. For more financial chatter, click http://twitter.com/savinmavens.