[title subtitle=”WORDS courtesy Arvest Bank
IMAGE marekuliasz/Shutterstock”][/title]
For some Americans, tax time is a time of excitement as they wait for a check in the mail or an electronic bank account deposit from Uncle Sam due to overpayment of their taxes. What’s not to love about receiving money? Each year, millions of people who file their taxes wind up with some sort of refund from the government. In 2019, for example, the Internal Revenue Service (IRS) issued more than 100 million refunds.
Instead of immediately choosing to spend this money, many people can choose to use their refunds wisely and take advantage of long-lasting benefits. Here are some great suggestions for putting this year’s tax refunds to work all year long.
Build an emergency fund
In these challenging economic times, many people live paycheck to paycheck. Last year, the Federal Reserve Board found that forty percent of Americans don’t have the cash on hand to cover a $400 emergency. This makes unexpected expenses, such as car or home repairs difficult to manage.
One way to help with unexpected expenses or losses in income is to have an emergency fund. Putting this year’s tax refund directly into the bank could be the most important thing to do, especially when dealing with little or no savings. Talk with a local banker about opening or adding to a current savings account that can serve as an emergency fund. It’s recommended to save enough money to cover at least seven months of expenses.
Reduce debt
Whether it’s credit card debt from the holidays or debt from student loans, consider using the tax refund to pay down existing balances. It’s always wise to pay off the highest-interest debt first.
Make home improvements
Consider using the tax refund money to finance important home improvements. These improvements could potentially help in the long run by increasing the value of the home. This can include small, cost-effective upgrades like installing new windows or a new roof that will pay off in both the short and long-term.
Make an energy-efficient purchase
Use the refund to purchase energy-efficient appliances, such as a dishwasher, dryer, or refrigerator, which can help save money year-round.
Start a college savings plan
It’s never too early or too late to start saving for the future when it comes to college-age children going to school. Look into opening a tax-advantaged 529 education savings plan to ensure school expenses will be covered when the time is right. Once the plan is open, arrange to invest in the fund on an ongoing basis. Even a small amount of money each month will add up over time.
Save for retirement
Most employers offer a 401(k) plan for employees to invest with the company, but if not, consider opening an Individual Retirement Account (IRA) with the refund check. Be sure to check with a financial advisor first before opening or increase contributions to a tax-deferred savings plan like an IRA.
Pre-pay the mortgage
Consider putting the funds from the tax refund toward the principal of the mortgage loan. Pre-paying the mortgage to help reduce the term of the home loan, and the amount of interest to be paid off over the life of the loan, can be a wise move in the long-term. Making an extra payment on the mortgage each year could potentially save thousands of dollars in interest for the total amount of the loan. Be sure to inform the lender that the extra payments should be applied to principal, not interest.
The decision on how to best use this year’s tax refund depends on each individual’s unique financial situation. However, choosing any of the options above can help put people on the right path towards reaching their financial goals.
Consumers who are looking for more resources can visit with a local Arvest branch manager or visit Arvest.com for more information.
