How a Tax Refund Can Advance Your Financial Game

Receiving a tax refund can feel a bit like winning the lottery, when in reality you’re just getting back money you overpaid for taxes. Don’t let that burst your bubble, though. With the average refund coming in at $3,120 so far this year, there are plenty of ways to put a refund to good use. Here’s a look at what to consider.

Reduce credit card debt
Instead of using a refund as an excuse to max out your credit card, do the opposite by tackling any debt hanging over your head. Take care of outstanding balances so interest charges won’t get the chance to increase your debt to sky-high levels. Instead of dipping into savings, use your tax refund.

Add to an emergency fund
A tax refund can provide a great spark to jump-start or replenish an emergency fund. Most financial planners agree that this should hold three to six months’ worth of living expenses and that you should only pull money out in the case of — you guessed it — an emergency, such as a broken bone or unexpected job loss. Although a refund is unlikely to fill your entire emergency fund, it can get the saving momentum going.

Maximize retirement savings
Almost half of all Americans worry that they’ll run out of money in retirement, according to a recent study by the Teachers Insurance and Annuity Association — College Retirement Equities Fund, or TIAA-CREF. A good way to quell those anxieties? Start or add to savings. If you’re already packing away cash, boost your monthly contributions. For more guidance on retirement saving, visit a financial institution such as Hopewell Federal Credit Union.

The takeaway
If you have all your bases covered, consider using a tax refund to pay for essential expenses such as groceries, gas and rent. Or, if you’re feeling charitable, you could donate some of that money and perhaps reduce your taxes for next year.

It’s also wise to adjust your withholdings to minimize your refund by filing a new W-4 form with your employer. Sounds counterintuitive, but the smaller your refund, the more immediate your access will be throughout the year to cash that’s yours to begin with.

Instead of buying things that lack long-term value, use your tax refund to reduce your debt, add to your retirement savings or contribute to an emergency fund. You might find that setting yourself up for a stable financial future feels just as good as winning the lottery.
Tony Armstrong, NerdWallet

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When It Comes to Car Loans, Shorter Is Often Better

A longer-term loan can make even the most expensive car look affordable.

By stretching out the loan over many years, your monthly payment is likely lower, but you could end up paying a lot more in interest. Still, many people find such loans attractive.

The average new car loan is now 67 months, according to Edmunds.com—the second-highest average term on record. Almost 25% of vehicle loans made in the second quarter of 2014 were for 73 to 84 months, according to Experian.

That’s well above the standard three- to four-year loan that used to be typical for new car purchases. Here are some of the problems with taking out a longer car loan:

• The longer the term of the loan, the worse your interest is likely to be. Shorter-term loans generally qualify shoppers for a better rate;

• There’s a greater chance you’ll end up underwater. Without a substantial down payment, if you total the car or need to sell it, you could end up receiving less than you owe on the loan; and

• You’re stuck with the car even if you don’t want it anymore. If you want to buy a different vehicle, you likely won’t be able to trade in your car because of the difference between what you owe and what the dealer is willing to pay for it.

If you need a longer car loan just so you can afford to buy the car, that’s probably a good sign that you can’t afford the car in the first place. Strive to keep the length of your car loan shorter to save money, and visit Hopewell Federal Credit Union for preapproval on a loan before you even begin shopping.

That way you know exactly how much you can afford, and you can avoid taking out a loan that’s going to be a financial burden long after the new car smell has evaporated.

If you have an auto loan from another financial institution, Hopewell Federal Credit Union can help you refinance to a shorter term and still help you stay with an affordable payment.