Savings Ideas for Your Tax Refund
April 12, 2009
Millions of Americans will file their taxes this week and will soon be able to start checking their mailboxes for a refund check. The average refund issued by the IRS will be for over $2,000. So with so many Americans expecting a healthy refund the question is: What Should We Do With Our Refund Checks? Here are a few ideas from MoneyRates.com:
1. Pay Off Credit Debt
It is just not interesting or fun to pay off credit card debt. However, for many households it is crucial. Rates on credit cards average over 10% and credit card companies are reducing the amount of available credit on many accounts. Paying off credit card debt with your refund check will improve your credit score, reduce financing charges, and increase available credit. You don't spend your whole refund check on an extra payment on your credit card balance, but keep in mind credit card debt is one of your biggest financial enemies.
2. Open a Rainy-Day Savings Account
The millions of jobs lost during the economic recession has impacted millions of families in an unfortunate way. Millions more families have seen a reduction in their household wages or benefits. The painful lesson that many families have now learned (the hard way) is that an emergency savings account is needed to help pay crucial bills like the mortgage, utilities, health care costs, and education expenses when a crisis occurs. Setting up a savings account which is designated for emergencies is very smart financial planning. The rainy-day savings account could be in the form of a basic savings account, a money market account, or even a CD. Just make sure you use MoneyRates.com to find the best rates for your rainy-day savings account.
3. Pay Closing for a Refinancing
The average rates on both 15-year and 30-year fixed mortgages are below 5%, which could provide monthly savings to millions of Americans if they refinanced their existing mortgage. An attractive option offered by many lenders is the ability to roll your closing costs into a new mortgage. This increases the monthly payments and potentially the number of months it may take you to pay off your mortgage. A good option might be to use your tax refund check to pay the closing costs at closing and keep your refinancing amount lower.
4. Retirement Dollar Cost Averaging
The stock market has gyrated wildly in the last year shaking the confidence of many people looking at the current value of their retirement savings accounts. The previously held sentiment that throwing tax refund checks straight into the stock market may not be quite as strong as it was in previous years. One way an investor can still invest their tax refund into retirement savings, without sweating out the fluctuations of the stock market, could be by utilizing an investment strategy called "dollar cost averaging". Dollar cost averaging is the systematic investment of a preset amount of funds at regular intervals. You decide how much and how often the investments are made. The advantage is that, instead of potentially buying into the market at an inopportune time, an investor can take advantage of market dips with their monthly investments.
5. Save For Your Kids with a New Bank Account
As painful as it is can be for a parent to look at their retirement savings account balances, it can be even more painful to see that an account designed to provide future college tuition money for their children has lost value. While this doesn't mean that 529 plans do not provide great tax advantages and long-term appeal, it may also let some parents rest easier at night knowing part of the college savings for their kids is in a FDIC-insured bank account. Investing a tax refund in a bank savings account, bank money market account, or a bank CD might be just the right way to add more savings for college with the security of knowing the fund's will not lose value.
