Pay off bills
Paying off bills is a great idea
- First priority: regular monthly bills if you have gotten behind (utilities, phone)
- Most other debts should be prioritized with highest-interest rates paid off first.
Suppose you have a credit card balance of $2,000 at an interest rate of 18%, and you're making payments of $50/month. At that rate it will be 62 months before the bill is paid off, and it will cost you $1,077 interest.
If you use your tax refund to pay off $1,000 of that bill, and then continue to pay $50/month, the bill will be paid off in 24 months, at an interest cost of only $198.
You save $800 interest by paying $1000 toward the debt now.
How much can you save by paying off your debts early? Find out with PowerPay
Do you find yourself in a yearly cycle?
A. using your tax refund each spring to get caught up
B. then gradually getting more and more behind throughout the year, (and more and more stressed out), until....
C. you can once again use your tax refund to get caught up
You can prevent this common cycle by putting more money in your regular paycheck, instead of getting such a large tax refund.
Save for needs in the coming year
Emergency Funds. Having money saved for emergencies can get you through small emergencies like car repair or medical bills without breaking a sweat. In the ultimate emergency (loss of income), an emergency fund can keep you afloat until you find another income source.
Use part of your tax refund to start or build your emergency fund!
Occasional Expenses. Those big bills that come once a year or every few months can cause huge problems for families. Avoid those problems by being ready for the bills! Use your tax refund to start a special savings fund, then keep adding to it throughout the year.
Long-term savings!
You CAN make progress toward long-term goals, and your tax refund can help make that happen.
- Even small amounts add up.
Adding just $500 a year into a retirement account such as an IRA can make a difference over a period of decades. Earning an average annual return of 9%, a contribution of $500/year would yield $68,100 after 30 years.
- Take the "small amount" theory one step further.
Build on the momentum created by that once a year contribution, and make a monthly contribution too. If you contribute $500/year and $25/month, earning a 9% return, in 30 years you will have $113,800!
- Contributing to your retirement may pay off with a tax credit!
Moderate-income workers who contribute to their retirement accounts may qualify for a tax credit! For example, a married couple filing jointly with earnings of $32,000 would qualify for a 20% credit. That means that if they contribute $2,000 to retirement accounts, they will receive a direct tax credit of $400! Consult with the IRS for details!
Special Purchases
What about that new refrigerator? Or the sofa? Or... ?
Those purchases are valuable, too. Some may be essential, while others simply add enjoyment to life.
Your best bet:
First put some of your tax refund toward financial security:
- pay off some debt
- plan for needs in the coming year,
- set some money aside for long-term goals.
Then use part of your tax refund to make your day-to-day life better. Among all the items on your "wish list," choose the most important and shop wisely for it!
For unbiased information about specific products, consult Consumer Reports magazine or Consumer Reports on-line.