One of the few moments of excitement when it comes to doing your taxes is receiving a tax refund. Roughly, 70% of Americans, will receive a tax refund this year… If you fall into this camp, what should you do with that check that’s in the mail?
Let’s first take a look at what people say they plan to use their refund on according to this year’s Gobankingrates survey.
Out of 5,000 respondents:
43% will save the money
36% will pay off debt
10% will take a vacation
Ok, so an overwhelming majority of people plan to do the right thing and save this money or pay off their debt. Great. Hard to argue with that. Whether or not that actually do so we will never know. You can, however, choose to use part of your refund for some things and part for others.
Although we all have a unique relationship with money, in a logical world this is how you should prioritize where your refund goes for the boring stuff.
Pay off credit cards
Credit card interest rates are currently around 17%. In comparison, a high-interest savings account pays you 1.65% interest. That’s a pretty substantial difference. So if you are not paying off your credit card on a monthly basis, using your tax refund to do so is a no-brainer.
As we discussed in our blog Doomsday Prepping: Adding A Little Crazy To Your Finances, when life throws at you a curveball, having access to funds to cover the associated expenses is a priority. Before considering the fun ways on which to spend your tax refund, make sure you establish an emergency fund.
Pay Down Debt (Mortgage, student loans, car loans)
Ask yourself which number is greater: the potential return on your investments or the interest you are paying. If you are paying more interest on your existing debt than you could earn by investing your tax refund, you are far better off paying down debt. It is important, however, to consider the emotional component here. Besides the math, for some people, it might help them to sleep better at night having a smaller debt load, regardless of the interest comparison.
Buy Life Insurance
If your partner or children depend on your income, having adequate life insurance is essential. Protecting your loved ones from any unforeseen life events is one of those unfun “to-dos”. You just have to suck it up and get it done.
Get a Will
This is a super adult thing to do with your tax refund. If you are married or have kids, leaving unanswered questions about how to settle our affairs for those we leave behind is kind of a big deal. If you want a roadmap, check out our estate planning guide.
If you enjoyed this post, check out How Much Will Lebron’s Taxes Be Under The New Plan?