Wednesday, June 29 2022

For millions of Americans, it’s the biggest motivator to graduate tax returns Every spring is the prospect of getting a big chunk of cash at the end of the process.

Averaging $3,100 this year, tax refunds are a major source of income for many households — bigger than a single paycheck for most people. According to financial advisors, a one-time payment can be an opportunity to achieve financial goals, such as: B. paying off debt, setting up an emergency fund, or even saving for a down payment.

Here’s what personal finance experts say about spending that money wisely.

Think of your financial needs first

Before issuing this refund, briefly assess your personal situation to determine what is most urgent.

“The number one question people should be asking is what they absolutely need to fund now,” said Max Pashman, a board-certified financial planner based in California. “The problem I see a lot is that people get a lump sum and then try to figure it out later. The end result is a shopping spree or a purchase they may later regret.”

When assessing your financial needs, keep in mind what is urgent. Have you deferred bill payments? Is credit card debt taking a toll on your budget? Or maybe you’ve been waiting for a big purchase like a device or professional certification.

Typically, experts recommend a combination of paying off debt and investing your repayment.

“If an issue is preventing you from achieving your goals, this is a great opportunity to attack it,” Pashman said.

In this way you avoid excessive fees for the tax return


1. Pay off your credit cards

After necessities such as housing, transportation, utilities, and groceries are paid for, paying off debt should be the next priority. First, try to eliminate high-interest-bearing debt like credit cards or personal loans, financial planners say.

“If you have a balance month-to-month, that should be one of your top priorities for deploying additional funds – it would be hard to beat that return on investment!” said financial advisor Sam Lewis, founder of SJL Financial, in an email.

The average APR on a credit card today is between 19% and 20%, which means paying a balance gives you an instant return on it.

Maggie Klokkenga, a certified financial planner who specializes in debt reduction, advises her clients to try to eliminate a single debt instead of tackling them all at once.

“A lot of people have multiple credit cards. If there is a balance that you could perhaps just pay off or pay back a significant amount, that’s a great mental win. It really gives them the nudge to say, ‘Look what I just did — I can do more,'” she said.

2. Pay off other debts

If you’re trying to handle multiple debts with your refund, focus on the ones that are affecting your credit score, such as: B. a credit card, car loans, or overdue utility bills, advised Klokkenga.

Medical debt, which is a burden for many Americans, will soon no longer affect your credit score, she noted. While people with healthcare-related debt should try to work out a payment plan with the provider, “medical debt is usually at the bottom of the list,” she said.

3. Build a financial cushion

After you pay off a large debt, consider whether you have enough money to handle unpleasant financial surprises like a job loss or a car accident.

Polls show most Americans lack fun on rainy days. More than half the country would not be able to cover a $1,000 emergency, Bankrate found January.

A tax refund can be a great way to boost that emergency fund that can save you from going into debt later.

“When you’re faced with unexpected emergencies, you don’t want to rely on high-yield credit cards, disrupt growing investments, or raid your tax-protected retirement accounts to put out the fire,” said John Pak, a certified financial planner based in Los Angeles.

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4. Pay your pension or insurance in advance

If your debt load and bank accounts are in good shape, see if you can use your refund toward your retirement, said William Nunn, a New Orleans-based CFP.

“It now lets your money work for the rest of the year instead of having to wait for every payday,” Nunn said.

Making a lump sum contribution is easy with an IRA or Roth IRA. Be sure to stay within the limits – This year, workers under the age of 50 can contribute up to $6,000.

For employees with employer-related accounts, such as A 401(k) plan, for example, it’s still possible to increase contributions early, Nunn said. Most plans give you the ability to adjust the portion of your salary that you pay into your plan. Add the amount equal to your tax refund to this number.

If you have life insurance or home insurance, you can save money by prepaying a year’s premiums. Most policies require policyholders to spread premium payments, which translates to about 6% more per year, according to Nunn.

5. Pay off your car loan

Car owners with high monthly payments but a low loan balance used to finance the vehicle should consider using their refund to pay off more quickly, Nunn said.

“It won’t charge a new payment … but you’ll be done with the loan quicker,” he said.

For example, if you have a monthly payment of $500 and you owe $10,000 on your car, putting the entire $3,500 refund on the balance would shorten the loan life by nine months.

“If you know it’s a car that you’re going to keep for a while, it might be worth it — especially since it puts $500 a month in your pocket to do other things,” he said.

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6. Invest in stocks

“If the fundamentals of your financial life are in order — that is, you have adequate emergency funds, little to no consumer debt, are actively saving in a 401(k) or other retirement plan — then you should consider moving into a taxable brokerage account.” investing.” Jason Dell’Acqua, president of Crest Wealth Advisors, told CBS MoneyWatch. “If you have a long-term investment horizon, recent market declines may work to your advantage.”

In fact, investing your refund can help hedge against inflation, which is over 8% this year.

“With inflation hitting 40-year highs, it’s very likely that most of us are losing purchasing power by holding money in a bank account,” Pak said.

“[B]Investing seems daunting given the current volatility in both the stock and bond markets. However, to maintain or beat inflation, stocks have historically been the proven vehicle of choice,” he added.

7. Buy I Bonds

Rising inflation is making a somewhat obscure investment vehicle much more popular. Several finance professionals recommended that taxpayers look into Series I bonds, which are U.S. Treasury bonds whose yield is linked to inflation.

“Sparr I bonds adjust for inflation, and the new May series is returning 9.6% annually, which is above most stock returns,” noted Jay Lee, a New Jersey-based CFP.

It’s easy to buy bonds directly from the US Treasury Department. Typically, investors are limited to electronically purchasing $10,000 of I-Bonds in any given year. However, if you channel your tax return into I-Bonds, you can buy an additional $5,000 in paper bonds, Pak noted.

“The window to buy paper bonds is narrow. You must fill out IRS Form 8888 when filing your taxes,” he said. “If you can keep this for five years there is no penalty, but if you keep it for less than five years the interest from the last three months is forfeited.”


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