Three great ideas for what do to with a tax refund include putting it in a CD, starting a savings fund and paying off credit card debt. Below, we show why each of these choices is a much better option than spending the money.
The average tax refund is almost $3,000. While it’s common for people to use this money to splurge on consumer goods, like new TVs and other merchandise, the smarter money takes a different path.
Starting a CD can ensure the money doesn’t get spent on frivolous purchases and stays out of sight, out of mind and earns a little interest. Starting a savings fund can help create financial breathing room. Paying off credit card debt can open up dozens of new financial possibilities.
1. Put the Tax Refund in a CD
Putting a tax refund in a CD is a great way to keep from spending it and a nice way to earn a little interest.
CDs, or Certificates of Deposit, are some of the safest investments going. They’re offered by banks and credit unions and they generally pay higher interest than savings accounts. The one downside of CDs is that the money in them has to stay in them until the time limit on the CD expires.
For instance, Wells Fargo is one of the largest national banks and offers savings accounts that earn .01% interest. While it’s nice to earn interest, .01% isn’t much. A savings account with a $1,000 balance and a .01% interest rate will earn less than $5 over a 40 year span. Since people can take their money out of a savings account at any time, there’s less incentive for the banks to offer any real interest on money in the accounts.
By contrast, Wells Fargo also offers four different CDs that lock in the consumer’s money for anywhere from 9 to 58 months. A 9 month CD with that bank earns .1%. A 26 month CD earns .2%. A 39 month CD earns .3% and a 58 month CD earns .5%. While the interest is still slight, it’s better than a savings account and the money won’t get spent mindlessly.
Money in CDs is usually protected by the FDIC and is therefore as safe as money in a checking or savings account, but with the upside of earning interest. Another bonus is that consumers are less likely to touch money in CDs, encouraging savings to stay saved.
2. Create a Savings Fund With the Tax Refund
Using a tax refund to create a savings fund is a great way to get started.
Most American’s simply don’t save. That’s bad because lack of savings leads to a troubled retirement. At a time when most people are seeing lowered earning potential and increased healthcare costs, money in the bank is essential.
Beyond saving for retirement, an emergency fund is vital. People who lose their jobs or suffer a cut in hours and pay can struggle to make ends meet. An emergency fund of three to sixths months of expenses can provide some much needed breathing space to someone who falls on hard times. Even a car that breaks down or a blown-out hot water heater can cause surprise expenses. An emergency fund can help with those costs as well.
While putting away three to six months of expenses can seem like a daunting task to someone who’s just scraping by month to month, a tax refund of $3,000 or even $1,000 can be a great kick start.
3. Pay off Credit Card Debt With the Tax Refund
Using a tax refund to pay down or pay off credit card debt can give someone a nice boost in an area where success often feels impossible.
Credit card debt can be daunting. Consumers often struggle to make minimum payments, feeling like there’s no light at the end of the tunnel. With the median credit card debt in the U.S. sitting at $16,000, even someone who pays nearly $600 a month can take three years to pay off their debt.
Carrying that typical credit card debt for the average working life of forty years at the average interest rate of 15% would create a whopping $4.5 million in debt. Of course most people don’t hold onto debt like this and let it grow rampant. They either abandon the debt, which can ruin their credit rating for seven years and make them pay a lot more on future debt, or they make payments.
Even the typical American who makes payments will pay $2,400 a year in interest alone on their credit cards. That’s terrible, because if that money was invested instead at a return of 8%, it’d grow to over $671,000 in 40 years. That’s $671,000 the typical American is leaving on the table because of a little rectangle of plastic.
Reducing that debt by the amount of an annual tax return can cause nice ripples in the other direction. If the average tax refund is $3,000, that means most Americans could pay off their credit card debt in just over five years, using nothing but tax refunds.
For more info about paying off credit card debt, see our article about the 6 easy ways to reduce credit card debt.
Article Source: What is the Average Tax Refund? – Bargaineering.com