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What can you do with your tax refund if you want to do more than just spend it? The average tax refund is about $3,000, enough to make a dent in your credit card debt, build up your savings, do a few home repairs, max out your retirement, start a brokerage account or invest in yourself. For seven smart ways to spend your tax refund and improve your finances, read on.
Paying down credit card debt can save you money and improve your credit. Carrying a credit card balance can be costly. According to Experian data, total credit card balances increased to $1.07 trillion in 2023, up $157 billion from 2022. Credit card interest rates are also up: The New York Fed reports the average annual percentage rate (APR) on credit cards was 22.8% in 2023, nearly double the average APR of 12.9% in 2013.
How can paying down credit card debt improve your financial standing?
Your tax refund is the perfect seed money for an emergency fund. Although you’ll ultimately want to build up three to six months’ worth of expenses in an emergency account, starting with a few thousand dollars from your tax refund gives you a huge leg up. Setting this money aside could help you avoid taking on debt should an emergency expense arise. Consider opening a money market account online: They typically pay higher interest rates than regular savings and let you write checks or make debit transactions when you need money in a pinch.
If you already have an emergency fund, now may be a good time to add to it. Expenses have gone up across the board in the past few years, so your emergency savings may not go as far as it once did.
Have you been putting off home repairs or upgrades? Spending on home improvements declined in 2023 for the first time since 2010, due to price increases, high interest rates and a dip in home sales, according to the Joint Center for Housing Studies of Harvard University. Though postponing expensive repairs may be understandable, using your tax refund to maintain or improve your home can be a good investment in your home’s value—and livability.
The same principle applies to your vehicle. If you’ve been deferring maintenance, use your refund money to keep your car in good running order. You’ll save money on repairs over the long haul.
Contributing to any tax-advantaged retirement account is an excellent use of your tax refund, but refund time can be an especially good moment to consider a Roth IRA or Roth 401(k). Here are a few reasons why:
In 2024, you can contribute up to $7,000 to a Roth IRA, $8,000 if you’re 50 or older. If your employer offers a Roth 401(k) plan, you can invest up to $23,000 in 2024 with a catch-up contribution of $7,500 if you’re 50 or older. Your contribution to a Roth 401(k) may come with employer matching dollars that give you an immediate return on your investment. With both a Roth IRA and a Roth 401(k), contribution limits are for combined contributions to Roth and traditional accounts.
Sinking funds are savings you designate for specific purposes. You might create a sinking fund to pay for this summer’s vacation or to save for a down payment on a house. Here are a few ideas for funding special projects with a typical tax refund:
Opening a taxable brokerage account opens the doors to a world of investments: individual stocks, mutual funds and exchange-traded funds (ETFs), bonds and bond funds, and more. Although investment returns aren’t guaranteed, adding investments can help you diversify your portfolio and grow your money. Here’s an example: If you invested $2,000 of your 2022 tax refund in the S&P 500 in March of 2023, it would have been worth more than $2,500 at the end of February 2024.
Smart investing requires some basic know-how, but many brokerages may offer information on how to invest, access to advisors and robo-advisors that automate your investment choices.
Spending on yourself is not off limits. On the contrary, consider using at least part of your refund to pay for something that represents an investment in yourself and your life.
Before you earmark your tax refund, you’ll need a place to hold it. The fastest and safest way to receive your tax refund is through IRS direct deposit to a bank account. If you don’t have a checking account, consider the Experian Smart Money™ Digital Checking Account & Debit Card, which can help you build credit without debt by linking to Experian Boost®ø. Start building credit with eligible bill payments after three months of payments. See terms at experian.com/legal.
In the end, a tax refund really isn’t a windfall: It’s money you overpaid to the government throughout the year. While a sizable refund may be a sign that you should consider adjusting your withholding (or estimated tax payments if you’re self-employed), it can also provide you with an annual opportunity to do something significant: Pay down your debt, amass savings, contribute toward your retirement, splurge or even use your funds to help someone in need. While the money itself is not a gift, the opportunity to do something good with it certainly is. Enjoy!
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you make the most of your financial opportunities!
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