Now is the time of year that most Americans are preparing and filing a tax return. If you will be receiving a tax refund this year, you may be thinking about what to do with the refund. In fact, the money may already be spent. For many consumers the “extra” money is often spent on a vacation, an extra item for the house or maybe to pay off last year’s holiday bills. However, before the tax refund is spent, why not use the money to start investing in your future. Here are some ideas to get you started:
Pay off high interest debt. High interest debt for most consumers is a credit card or credit cards. While it may depress you to use your tax refund to pay only a portion of an 18% interest rate credit card balance, it can save you years of added interest payments. If you were to invest the money instead, you aren’t likely to earn an 18% return. Paying down your debt is like receiving an 18% rate of return on your tax refund.
Open an emergency savings account, if you don’t already have one. Most financial experts recommend having an emergency savings account with 3 – 6 months of living expenses. An emergency savings account will help if you experience a loss of income or have an unexpected expense.
Think about investing. Consider opening an individual retirement account or investing in a mutual fund or stock. There are many great options available that allow for small amounts to be invested each month. With as little as $25 you can invest in a mutual fund.
Save for a child’s education. There are numerous investment vehicles to help save for a child’s education. You might consider a Coverdell Education Savings Account, Qualified Tuition Programs (529 Plans), or a mutual fund. For more information about these options visit Tax Breaks for Higher Education at http://www.urbanext.uiuc.edu/taxbreaks/index.html.
Perhaps the best thing to do with your tax refund is to avoid receiving one. By getting a tax refund, you have given the government an interest-free loan, and are being repaid. Consider changing your withholdings so you have an extra amount in your paycheck each month. Then, set-up an automatic investment plan through your employer. Even an extra $50 or $100 can make a big difference when invested in a retirement account!
Using the “extra” money from your tax return to invest in your future will help you reach your retirement dreams. To learn about saving for retirement, tax benefits, goal setting, and investment options, visit University of Illinois Extension’s website, Plan Well-Retire Well: Your how-to guide at www.RetireWell.uiuc.edu.
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Source: Jennifer Hunt, Extension Educator, Consumer and Family Economics
East Peoria Center, University of Illinois Extension
(309) 694-7501
