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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