Save or Spend: 5 Ways to Make Your Refund Count This Tax Season
According to the Internal Revenue Service, the nation’s taxpayers received an average tax refund of nearly $3,000 in 2016. This year, with more than 70 percent of taxpayers receiving a refund, the American Bankers Association is highlighting five tips to help them make the most out of their windfall.
“Tax season is a great time for consumers to reassess how they allocate extra cash,” said Corey Carlisle, executive director of the ABA Foundation. “It’s wise to take steps toward securing your financial well-being like storing your refund for rainy days or using it to get a jumpstart on saving for retirement.”
To help consumers make the most out of their money, ABA has highlighted the following tips:
• Save for emergencies. Open or add to a high-yield savings account that serves as an “emergency fund.” Ideally, it should hold about three-to-six months of living expenses in case of sudden financial hardships like losing your job or having to replace your car.
• Pay off debt. Pay down existing balances either by chipping away at loans with the highest interest rates or eliminating smaller debt first.
• Save for retirement. Open or increase contributions to a tax-deferred savings plan like a 401(k) or an IRA. Where can you get one? Your bank can help set up an IRA, while a 401(k) is employer-sponsored.
• Put it toward a down payment. The biggest challenge that most first-time home buyers face is coming up with enough money for a down payment. If you intend to buy a new home in the near future, putting your tax refund toward the down payment is a smart move.
• Invest in your current home. Use your refund to invest in home improvements that will pay you back in the long run by increasing the value of your home. This can include small, cost-effective upgrades like energy-efficient appliances that will pay off in both the short and long term. If you have more substantial renovations in mind, your bank can help with a home equity line of credit.
Get Serious About Saving!
1. Set a goal
Your goal should be realistic, measurable, achievable and timely. Follow these guides to prevent you from setting yourself up for failure. Calculate your savings goals.
2. Choose a savings account thoughtfully
Savings accounts can vary greatly when it comes to interest, fees, and minimum balance requirements, so do your homework and find the account that is best suited for you.
3. Save Automatically
We all have weak moments when we have good intentions but something comes up. Make your contribution automatic by establishing direct deposit from your payroll and avoid your savings plan becoming derailed. You can also have it automatically drafted from your checking account into your savings via your online banking tools.
4. Establish an emergency fund
What would you do if you lost your job or were in an accident that created extended hospitalization? Do you have enough money to get you through if you were off work for several months? While your savings account might be for a major purchase – like a new car or even a down payment of a new home – an emergency fund is an account you fund and do not touch unless there is an actual emergency. Experts say you should have four to seven months’ worth of expenses in your emergency fun.
5. Monitor what you are spending monthly
Keep detailed records of your expenses for one month. Track every single purchase down to the cent. This will provide you a sense of control by knowing exactly where all of your paycheck is going, and it will provide a guide to set a realistic budget with. This exercise will allow you to find ways to adjust your spending behaviors in order to increase your savings.
6. Now it’s time to set your budget
You now know where all of your money is going, so setting a realistic budget will be easier. You may have to make adjustments to figure what will work best for your lifestyle. You won’t have to cut out all of the fun stuff, but sticking to your budget will help you reach your savings goal.
7. Be a wise shopper
Look for ways to save. Sign up for rewards or loyalty programs, shop at the warehouse and club stores, clip coupons and plan your trips strategically to take advantage of the best offers. When shopping online utilize price comparison websites.
8. Get App savvy
You can find an app for just about everything. So look for apps that will help you be a better saver. There are budgeting apps, ones that help you find the best local deals and apps that will assist you to sell your old items to other people. Find one or two apps that will help you save and then use them regularly.
9. Save your windfalls.
Every time you receive a windfall – maybe a bonus or a tax refund – put a portion into your savings account.
10. Monitor and Reward
It is important to check on your progress. Establish a set day of each week to review how you’re doing. If you derail from your plan, just regroup and get back on track. When you hit your savings goals don’t forget to reward yourself a bit. Savings is all about self-control, but not completely cutting out everything you enjoy, when you reward the milestones you reach you are less likely to abandon your saving plan.