As of April 12th, the average taxpayer who has received a tax refund in 2019 will receive a $2,795 payout(1). While the payout is down 1.3% from this time last year, it’s still a significant refund. And if strategically spent, can save you even more in the long run!
A recent survey from GOBankingRates.com(2) shows that many Americans plan to spend their tax refund wisely. Over 50% plan to pay off debt, invest or save their refund. Coming in at 16% in the survey? Americans plan to stash their tax refund into savings.
Build a Small Emergency Fund
If you don’t have an emergency fund, using your tax return (or part of it) to fund one is the first step in taking control of your money. According to Bankrate.com,(3) only 39% of American’s would be able to cover a $1,000 emergency with savings. This leaves the majority to find another way to cover the cost – typically using credit cards or other methods that in incur debt and interest.
Once you have an emergency fund to cover those potential unexpected emergencies, the next step towards controlling your finances is to pay down any existing debt. That’s exactly what over a quarter of those surveyed plan to do with their tax refund. With the national debt at an all-time high of $13.54 trillion,(4) it’s not a surprise that 27% of taxpayers want to use at least part of their tax refund to pay down debt.
What would this look like? We took the most common average American household debts and ran the numbers to see what would happen if you put your tax refund towards them. The results were staggering! Read on to see how much you can save with these simple steps.
Take on Debt With Your Tax Refund
1. Chip Away at Credit Card Debt
In the 4th quarter of 2018, credit card balances rose to $870 billion(4) – marking the first time credit card balances have retouched the 2008 nominal peak. According to Nerdwallet,(5) the average credit card debt per household is $15,561. If you’re only making the minimum monthly payment of 2% with an average annual interest rate of 15%, it will take you approximately 6.5 years to pay it off. That’s assuming you don’t charge any more on your credit card during that time.
Now, let’s say you take your tax refund of $2,795 and apply it to the balance of your credit card. This one small move means paying it off almost 2 years quicker and saving $3,890 in interest.
What if you take it a step further? What if you adjust your withholding so that Uncle Sam isn’t holding on to it (interest-free, I might add) for the next year? You could bring home an extra $233 a month ($2,795/12) and apply it to your credit card debt. In this scenario, you’d pay off 3 years faster and save over $8,170 in interest! Your initial tax refund of $2,795 almost triples its value!
2. Stamp Out Student Loans
Another option is to use your tax refund to pay off your student loans. Student loan debt is at an all-time high of 1.46 trillion dollars(4) with the total owed by an average US household totaling $47,671.(5) At an average interest rate of 5%(6) your monthly payment would come to $506 per month. That amounts to $23,836 in total interest over a 10 year repayment period. Yikes!
What if you decided to use your tax refund to lower the loan balance and make the additional $233 monthly payments? It would mean saving $9,733 in interest and shaving 4 years off the loan period! Not bad.
3. Crush Your Car Loan
Car loans are another debt to consider paying off, especially since their value can decrease rapidly. Experian’s latest research(7) shows that the average new car loan is $30,977 with a 7.04% interest rate. The average auto loan term for new vehicles is almost six years. Using your $2,795 tax refund along with increasing your monthly payments of $233, you can save $3,634 in interest and pay off your wheels in 4.5 years!
Invest In Your Retirement
Got your debts and savings covered? Consider kick-starting or adding to your retirement account. Retirement in the US is approaching a crisis. In the coming decades, millions of Americans will get too old to continue working but will not have the means to retire. While stats may differ slightly by source, the story is pretty much the same. A 2018 study by Northwestern Mutual(8) shows that 21% of Americans have absolutely no retirement savings while an additional 10% have less than $5,000! One in three Baby Boomers currently in or approaching retirement age have between $0 and $25,000 set aside.
With an initial investment of $2,795 and $233 monthly contributions, you could grow your retirement account by $377,820 over the next 30 years ($86,675 in contributions & $288,144 in growth*). Talk about peace of mind.
So, whether your tax refund is fairly substantial or just a drop in the bucket, putting it to work for you can improve your financial situation! You can even treat yourself – just don’t blow it at on a huge, unnecessary splurge.