Approximately three out of four taxpayers receive a refund each year. And
most people are surprised to learn how sizable that refund actually is.
In the coming weeks, taxpayers will have to decide what to do with their
refund. A recent National Retail Federation survey found that approximately
one in 10 taxpayers plan to use their refund to invest in a major purchase,
and nearly 15 percent will splurge on a vacation. But before your mind
drifts to visions of a European cruise or a new 80-inch television, stop
and think about the long-term potential of these funds, rather than just
the short-term value. The single biggest mistake most people make with
their tax returns is being too shortsighted.
Whether you're receiving a $100 or $10,000 tax refund this year, here
are three ways to put that money to good use and make sure it lasts longer.
Pay off debt - Most Americans owe money in some capacity and a tax refund is a great
way to make a significant dent in that debt. According to January 2016
Federal Reserve statistics, the average U.S. household owes over $16,000
in credit card debt and over $33,000 in student loans, in addition to
the car loan that most Americans have. To maximize the impact you can
make with your refund, use the money toward the loan or credit card with
the highest interest rate and make sure to also make your regular monthly
payment. Paying more than your minimum payment goes a long way to paying
down debt quicker.
Develop a financial safety net - According to a
Bankrate.com survey, more than 25 percent of Americans have no emergency fund and 75
percent don't have enough savings to cover their bills for six months.
Whether it's a minor situation, such as leaky roof, or something as
big as losing your job, it's always a good idea to have enough funds
cover the unexpected and live comfortably. As a general rule of thumb,
aim to build a safety net of six months worth of expenses.
Invest it - Whether you choose to prepare for retirement or education expenses or
expand your portfolio with stocks and bonds, investing your refund could
provide the potential for your money to grow. In many investment strategies,
starting early can pay off as compound interest - the ability of your
assets to generate earnings which are reinvested to generate their own
earnings - can really work in your favor. Picking which investment is
right for you depends on your personal financial situation, taking into
account how soon you will need the money and how much risk you are comfortable
with taking. And keep in mind that unlike bank deposits, investment products
are not insured by the FDIC.
Your tax refund is a great way to make progress against your financial
goals. You can make the most of your return by simply taking a long-term
view. Speak to your financial advisor to find out which investments are
best for you or feel free to give me a call for a referral of a financial
advisor I have personally vetted.