The purpose of Money Talk is to improve readers' financial capability with research-based personal finance information.
Friday, February 15, 2019
Smart Uses for Your Tax Refund
Are you expecting
an income tax refund? You are not alone.In
2016, the average tax refund
amount was $2,782 and the IRS issued over $302 billion in refunds. Use your
refund wisely! Consider the following ideas:
¨Save for Emergencies- Aim to set aside at least 3 to 6 months
expenses in a money market fund or bank account.This is your “fall back fund” in the event of
unemployment or unanticipated expenses.
¨Pay Down Debt- The more debt you repay, the less interest
you will owe.Paying down an 18% credit
card balance is like earning 18% on an investment- plus it is a guaranteed return
¨Start an IRA- A one-time $3,000 tax refund invested in an
IRA containing a stock index mutual fund with an average 8% return will be
worth almost $31,000 in 30 years.A
$3,000 tax refund invested every year
for 30 years will be worth over $370,000.
¨Invest in Mutual Funds- Most mutual funds allow investors to open an
account with $3,000 or less.Choose a
fund with good historical performance, low expenses, and an objective that
matches your investment goals.
¨Improve Your Skills- Use your refund to take courses or attend
conferences that will make you a more skilled and valuable employee. Economists
refer to this as “building your human capital.”
¨Review Your Tax Withholding- A large refund indicates that your tax
withholding is incorrect (over-withholding).Hire an accountant or financial planner to review your finances or use
the online IRS Withholding Calculator.