It’s tax refund time and Americans do get tax refunds. In 2014, the average refund was $3,116, in 2015 it was $2,893, and we are expecting an average this year of $2,900. Last year’s refunds totaled almost $200 billion paid by the Internal Revenue Service to individual taxpayers.
If you are one of those folks who had more held out of your pay than you owe, you just might be receiving a hefty refund. Though it is easy to spend that check when it hits your mailbox, consider that this is an unexpected influx. What can you do with that check to improve your overall financial health? Here are six ways to use that refund to meet long-term and short-term goals.
Pay down your credit card debt. Even if you are meeting the minimum payments, chances are that you will never pay off your debt just paying the minimum amount. Drop that refund on the balance and it will really decrease the debt and the amount of interest you are paying. The average credit card interest rate this week is 15.99 percent. Putting your refund against that debt is like getting almost a 16 percent return on your investment.
Start an emergency fund. Chances are one of the reasons you have that debt on your credit card is that you resorted to your credit card when you didn’t have enough ready cash to meet an obligation. By starting an emergency fund, you’ll have the money needed if the worst option happens. As little as $2,000 will cover the average emergency in the form of a car repair, house repair or health bill.
Make an extra mortgage payment. If you will make one extra mortgage payment each year, you will reduce a 30-year mortgage to a 26-year mortgage. That saves you $22,769 over the life of the loan figuring on a $200,000 note at 4.5 percent.
Build retirement savings or college savings. Though we are more likely to put the money in our child’s college savings, the experts say it is smarter to put it in your own retirement savings. There are loans available for your child’s education, but loans are far rarer and more costly when financing your retirement. Whichever you choose, just put it in some type of long-term savings.
Invest in your home. For many of us, our homes are the place we live, but also the place we hold much of our investment equity. What will $2,900 buy? It may get you a few replacement windows, extra insulation, new cabinet tops, a fresh paint job or most of the cost of an efficient boiler. All these improvements will add to the value of your home and some even pay off in decreased energy use. This also gives you an opportunity to enjoy the improvement rather than waiting until you decide it must be done to sell it.
Prepay vacation. If you are going to take a vacation, pay for the plane tickets, cruise tickets or even the hotel bill. Paying ahead means that you will be able to enjoy the time when it rolls around and not worry about the charges on your credit card. I learned recently that by prepaying for a car rental I could save several hundred dollars on a weeklong trip. The prepayment option only works on the company’s website and the amount of the savings depends on the length of rental and type of car rented and, I suppose, the number of rentals that are reserved and not picked up at a given location.
Roxie Rodgers Dinstel is associate director of Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at firstname.lastname@example.org or by calling 907-474-7201.