Did you know that the average tax refund last year was over $2600? Yep, according to IRS Tax Stats, riveting reading I assure you, your average taxpayer received a check for $2,683 from Uncle Sam. That’s a very large sum of money, no matter who you are.
If you’re due a refund this year and if it’s anything close to the two and a half grand average from last year, you might want to take a few minutes to think about what you’re going to do. Your first instinct may be to go out and spend it but there might be other things you can do that will pay big dividends down the road.
1. Boost Your Emergency Fund. If you don’t have an emergency fund, I highly recommend getting yourself one. While the recession has probably bottomed out, you never know when you might run into an emergency that requires some quick cash. Having that money sitting in a savings account earning a good rate of interest will help you sleep at night.
2. Pay Down High Interest Debt. After you’ve given yourself a good emergency fund cushion, consider paying down high interest debt like credit card debt. When a portion of your monthly paycheck has to go towards such an expensive bill, that never seems to get smaller, you really limit your options. When you have a lot of debt, other decisions start becoming more expensive too. If you get a car loan or mortgage loan, expect the interest rate on those to be slightly higher than if you didn’t have that debt.
3. Spend Some Of It. This money was supposed to be in your paycheck each pay period and you overpaid, so it’s OK if you spend a little bit of it on something you want. By spending some of it you “blow off some steam” and give yourself a better chance of meeting your other financial goals. If you’ve been saving diligently for a down payment on a home, put a portion towards that goal and go out for a nice meal or something similar. You can’t deprive yourself forever and letting some of this money give you an emotional release is a good thing.
4. Contribute Towards a Roth / Traditional IRA. Give your retirement savings a little boost by putting your refund into a Roth IRA or a Traditional IRA. The limit for this year will be $5000, $6000 if you are 50 and older, so a $2600 contribution will get you over halfway there. By saving now, you can help ensure a comfortable retirement.
5. Pay For Overdue Maintenance. With the recession, you probably put off a few things you meant to do around the house or for your car. Take the time to bring it in for that checkup you meant to do last month or the tuneup you know you need. Give some rooms a fresh coat of paint or take a look at the weatherstripping on your doors. Earmark a few dollars to your local home improvement store and spruce up your place. It’s easy to put things off when the money gets tight and you might want to take care of it now with this little windfall.
6. Make An Extra Mortgage Payment. This one is a bit of a boring suggestion but it’s one that can save you thousands of dollars in the long run. Depending on how far along you are with your mortgage, you might want to add an extra mortgage payment and bring down that principal. The earlier in the mortgage you are, the bigger the interest savings, you can use this hokey looking calculator to see how much you’ll save.
Finally, if you are due such a large refund, file your taxes ASAP. The sooner you file, the sooner you get your refund.