If you are like most Americans you Uncle Sam will actually owe you back money this year for overpaid taxes in 2015. The IRS estimates that nearly 8 out of 10 Americans will get a tax refund this year. The average amount paid over the last few years was roughly $2,800, according to the most recent IRS data.
Don’t rush out and blow that tax refund on a car, new LCD TV, vacation or something else unnecessary. You should stop and think about where you can spend your refund and get the most benefit to your family. This would be a great opportunity to tie up some financial loose ends! Here are a few ways we think you should spend your windfall in order to get your life back on track!
1. Start that emergency fund we recently wrote about!
Remember most financial experts agree you should keep no less than six months’ worth of expenses in an emergency fund. For most of us coming up with that kind of cash isn’t an overnight affair. Why not take this opportunity to get a good chunk of that fund setup with your tax refund!
2. Pay down or pay off that nasty credit card balance.
Credit card interest rates can climb in the neighborhood of 20+%. This is probably one of the smartest tax-refund spending ideas. Paying off a high interest rate credit card could save you $1,000’s in interest! It may also motivate you to cut spending and start paying off other debt.
3. Open a Roth IRA.
Behind a “matched” 401(k) fund from your employer, a Roth IRA is my favorite type of investment. You fund a Roth IRA with money after you’ve paid taxes on it. The money in this retirement account grows over time until you are ready to retire. At that time you can take every penny out tax-free! The total amount you can contribute to either a Roth IRA or a Traditional IRA remains unchanged this year at $5,500. People 50 and over can contribute an additional $1,000 for a total of $6,500 to “catch up”. For complete details visit the IRS website.
4. Donate to Charity
I know, I know… you don’t want to give all your tax refund to charity; however, donating a portion of your refund not only helps out your community, you also get to write off the donation again for next years taxes! So in essence you get part of that money back again next year.
5. Fix up your House
If you’ve been putting off some household maintenance the past year now is a good time to take care of it. Even if you have to hire someone to help around the house it’s important to keep your house in tip-top shape. Letting needed repairs go on too long will end up costing you more in the long run. Great ideas include a new roof, landscaping, professional cleaning, plumbing and electrical issues.
These are all financial savvy ideas to spend your tax refund this year. Remember it’s OK to have a little fun. Maybe treat yourself to a nice dinner or a new outfit. Just don’t blow it on a Caribbean cruise or a new car. Maybe keep 10% for yourself and make the other 90% work for your smart financial future.