4 Smart Ways to Use Your Tax Refund
If you actually look forward to doing your taxes, you're probably one of the lucky 70 percent of Americans who expect to receive a refund from Uncle Sam.
While you're eagerly waiting for your check, you may be thinking about all the glorious ways to spend that money. Suddenly, these thoughts dance through your mind: That life-changing leather jacket you've had your eye on since last season, the weekend getaway you've been putting off forever or the bigger, flatter, higher-quality TV that you have to have.
Here's where you can be intentional about wants vs. needs. Rather than splurging on a big ticket item, consider paying off that lingering credit card balance or putting your refund into a savings account or your retirement fund.
Here are the four best ways to use your tax refund that will set you up for financial success.
1. Pay off credit card debt
A survey by GoBankingRates said 29 percent of taxpayers plan on paying down debt with their refunds. Good choice! Use your refund to pay down your credit cards or pay them off entirely.
This move can help you avoid expensive interest fees if you're making minimum monthly payments.
Once the cards are paid off, start saving.
2. Throw it into an online savings account
If you don't have an emergency fund yet, now is the perfect time to open one. The idea behind this type of savings is to cover you in the case of an unexpected event. You never know when you may experience job loss, your car breaking down or medical bills.
The general rule of thumb is to have at least six months' worth of living expenses (or more) put away.
If you're using a big bank for your savings, you're probably not getting the best annual percentage yield (APY). Average rates for big banks hover around 0.26 percent, while the average online savings bank is at 2.25 percent. That's a big difference!
Consider opening a savings account at an online bank, instead. At the time of writing, Marcus By Goldman Sachs Online Savings has a 2.25 percent interest rate while Discover Online Savings is offering 2.10 percent. Many online banks don't have a minimum opening deposit and don't come with any monthly fees.
3. Open a CD (certificate of deposit)
The rate of return on a CD is the highest it's been since 2009. A CD is similar to a savings account, with the main difference being how accessible your money is.
You can withdraw money from a savings account easily, but when you put your money into a CD, you can't touch it for a certain amount of time, often referred to as the term. There are terms that go for six months to five years, some even longer.
CDs may offer slightly higher interest rates than an online savings account, however, there may be a minimum opening amount (i.e. $500).
4. Get closer to maxing out your IRA for the year
As many financial experts would say, you're never too young to start putting away money for retirement. If you have an IRA (Individual Retirement Account), use your refund to inch your way closer to maxing it out — in 2019, you can contribute up to $6,000.
Tax season and beyond
A refund during tax season is a good way to jump-start your way to being more financially responsible. Make it a habit to throw your money into savings or your IRA whenever you happen to have a sizable chunk of cash (birthday money, a bonus at work, etc.).
If you have a lot of credit card debt, it may be wise to get rid of that first before you start saving.