Although tax season is often the most dreaded time of year, many consumers actually look forward to getting what's owed to them, particularly since in recent years the average federal income tax refund has been in the $3,000 range.
Once the refund is received, the question becomes one of how to responsibly use the money.
Consumers should never lose sight of the fact that this is not found money, but simply Uncle Sam returning your money to you.
Therefore, since you worked to earn this money, you should work equally hard to manage it. The National Foundation for Credit Counseling® (NFCC) suggests the following tips for smart ways to allocate your income tax refund:
- Pay down credit cards or other high interest loans. Use your refund to pay more than the monthly minimum payments. Add extra cash to loans with high interest rates, or totally pay off smaller obligations. Remember, credit card debt is simply an unsecured loan. The longer the life of the loan, the more you'll pay for borrowing the money.
- Pay down your mortgage. Put extra money toward the principal on your mortgage. Paying off your mortgage faster means you pay less in interest. Using your refund to reduce your mortgage debt can mean substantial long-term savings. Use an online calculator to see the impact of making just one extra mortgage payment each year.
- Contribute to or open an emergency fund. The NFCC's 2014 Financial Literacy Survey revealed that 34 percent of Americans have zero non-retirement savings. Your tax refund is a great way to start or build your rainy day account. By placing the cash in a separate savings account, you're going to be less likely to use it, thus it will be there when the emergency or unplanned expense comes along.
- Plan for retirement. Many people are now working after the normal retirement age of 65. For a number of reasons, retirement is not an option for many. The Financial Literacy Survey suggests why: 32 percent of respondents indicated they save zero toward retirement each year. The sooner you start saving, the more time your money has to grow. If retirement is many years away, it's all the better. Start planning now by making retirement savings a high priority, setting goals, devising a plan and sticking to it.
- Make needed repairs. If you've put off getting an oil change, cleaning the gutters or fixing the leaky roof -- now's the time to cross those things off your list. Using your tax refund to properly maintain expensive possessions such as your house and car protects your investments and could save you money in the future.