Are you anticipating a tax refund check? The average refund Americans receive is around $3,000, which can be utilized in a variety of ways. A recent survey found that 24% of the respondents spent last year’s refund in a matter of days and a little more than half of those surveyed admitted spending the money over a few weeks. Before making an impulsive decision, here are some other ways to allocate your refund.
Consider the 50, 30, 20 rule described below. While most Americans would benefit from following this rule, we strongly recommend taking the time to work on your financial plan and making specific financial goals. If you do not know where you are going, then you will never get there. Everyone needs a plan for finances, regardless of your income.
The latest statistics show 8 in 10 Americans are in debt. You might consider spending 50% of your refund to pay off debts with the highest interest. This will save you money by not having to pay the extra interest each month. You might not be able to pay everything off, but it could make a dent and help relieve financial stress.
Instead of spending your refund check in a flash, consider saving at least 30%. You never know when an emergency can happen. Nearly 3 out of 10 Americans have no emergency savings or rainy day fund. Ideally, you should have enough savings to cover your expenses for 3 to 6 months. If you already have a savings plan, you might think about adding money to a 401(k.) It will earn you extra money if your employer matches what you contribute. If you don’t have a workplace retirement plan, a financial advisor can help you determine whether to open a Traditional or Roth IRA. If you decide to contribute part or all of your refund to an IRA, you can have your refund go directly to your IRA account. You have until April 15th to make an IRA contribution for 2016. If you are eligible (there are income limitations on deducting an IRA contribution) you can take the IRA deduction on your 2016 tax return and then use your refund to make the 2017 IRA contribution.
If you made the decision to pay off debts or save, reward yourself by allocating 20% for spending. With the money left over, you can buy something special, go on a trip or do something nice for a family member or friend. You could also take that money and put it toward a bigger purchase worth saving for, like a college fund, buying a house, car or planning a dream vacation.
You may consider changing your withholding for 2017 so that you are not so far overpaid. Ask your employer’s HR department for a W4. A W4 can be filled out at any time and be changed multiple times in one year. Do not use federal withholding as a savings program. Instead get a little bit more each paycheck and direct that extra money toward your next financial goal sooner (reduce debt, increase savings).
Reasons to not use federal withholding as a savings program
- If you need the cash in the middle of the year you do not have access to it
- If you are a victim of identity theft, then your refund can be delayed 6 to 12 weeks
- Why pay fees for a rapid refund when you can get the money each week by lower withholding
- You are more likely to use the money wisely when received throughout the year than getting a large sum next year.
Sources: Yahoo Finance, Bankrate.com