‘Tis the season when millions of Americans get their biggest financial boost of the year. No, not from a winning bet on March Madness or picking the winning lottery numbers, but in the form of an income tax refund.
Last year, nearly two-thirds of taxpayers got a federal refund, averaging $3,167. That’s a good size chunk of change to spend and while it may be tempting to use it to splurge on something fun, you could use it to get ahead financially.
Here’s what financial advisors recommend to make the most of the money.
- Paying off high-interest debt - Financial advisors nearly universally agree this is a smart move. Start with the highest interest rates and put as much as you can toward paying them down. “It’s an immediate return on investment by reducing interest costs and improving financial stability while also providing peace of mind and a sense of relief from financial stress,” said Sam Swift, a certified financial planner.
- Start or add to an emergency fund - A lot of Americans don’t have any money set aside to use just for unexpected expenses, with a recent Bankrate survey showing 13% have no emergency fund at all and another 33% have some, but even higher credit card balances. Michael Sullivan, a personal finance consultant, recommends aiming for a minimum of $1,000 for emergencies.
- Put money into a retirement account - Once you’ve got an emergency fund and are paying down credit card debts, focus on longer-term goals with retirement accounts, like an IRA or 401(k). If your employer offers matching funds on contributions to a 401(k), take advantage of it. “Always at least contribute up to the amount your company is matching,” Swift advises. “It’s free money.”
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