I was fortunate enough to grow up in a household where I saw my Mom balancing her checkbook at the end of each month.
Agonizing as she attempted to find that penny that threw off her balance. Although checkbook balancing is a thing of the past for many Americans we still do not fare well when it comes to understanding key financial topics, most people unfortunately fall short. When you get a tax refund, the Internal Revenue Service (IRS) is sending you back money you worked hard to earn over the year. The average tax refund for 2018 in the State of Maryland (combined Federal/State) is $2,771.
If you are fortunate enough to be one of the millions of people to receive a refund the influx of cash can provide a great opportunity to improve your financial situation. Not everyone receives a tax refund. Seventy-one percent of tax filers receive a tax refund, so shy away from blowing the money on something you won’t remember by the time next year’s tax season comes around. Take the money and turn it into an investment in your financial success that will put you and your family on the path to financial freedom. Here are five things to consider when receiving that influx of cash.
Start an Emergency Fund.
Without an emergency fund we are all just one surprise major expense away from debt spiral toward financial disaster. Many experts say that your fund should contain 6-9 months’ worth of savings in an easily accessible interest-bearing account such as online savings or money market account. Rather than taking months or years to fund such account by having small amounts come out of each paycheck the idea of one larger lump sum along with the weekly or biweekly (depending on how you receive your paycheck) deposits can put you on the path to funding your account sooner rather than later.
Pay Off High Interest Debt.
The next best thing to do after establishing an emergency fund is to take that tax return and eliminate high interest debt that many of us carry. The compound interest that we pay on the monthly balance all but guarantees that this issue will be around for future tax seasons if you don’t do something about it now. Put your refund to work by starting or working with a professional to create a debt reduction plan paying off credit cards and debt consolidation/personal loans.
Invest in Your Retirement.
The chances are good that you probably didn’t maximize your tax-advantaged retirement accounts in 2017. Contributing to a 401(k), 403(b), Thrift Savings Plan or an IRA is a great way both get a tax break for 2018 and set yourself up for more secure retirement. If you invested an average of $2,771 refund this year in a tax-advantaged retirement account earning 8% returns, you would have almost $30,000 in 30 years. If you invested your tax return every year over the next 30 years, you would have more than $313,000 of course assuming you received close to the same $2,771 refund between now and retirement.