10
Great Ways to Spend an Income Tax Refund
Expecting a substantial
income tax refund this year? If so, you are in the majority - over
70 percent of Americans get money back at the end of the tax year,
with the average refund being close to $2,000. Rather than having
those precious dollars being absorbed into your normal spending
routine, get the most out of your cash.
- Pay down
high interest loans and lines of credit. With average
annual interest rates for credit cards and personal loans hovering
around fifteen percent, paying off that Visa card before making
other investment decisions makes good sense.
- Fund Your
Retirement Account. About 30 percent of all working Americans
have no money invested for their retirement. If you are one of
them, seriously consider making a contribution to an IRA contribution
right away.
- Invest it.
Instead of just working for money, let money work for you. If
you invested one lump sum of $1,500 in the stock market, over
thirty years at 12 percent interest (the 30-year market average)
you'd have $ 53,924. (Do your research first before making any
investment decision, of course.)
- Open an
emergency account. Most Americans don't have money set
aside for those financial emergencies that always seem to happen
when there is no cash in the coffer. A large tax refund is a great
start an emergency account. It should eventually total between
three to six months worth of essential living expenses.
- Pay for
repairs. Maintaining expensive possessions now will result
in dollars saved tomorrow. Use the money to repair that leaky
roof before it develops into a bigger problem; replace those dangerous
bald tires with new, safe ones.
- Start a
personal endowment. Investing in your emotional, physical,
intellectual, and career growth is a wise use of money. Whether
it's paying for a gym membership or a cooking class, you'll feel
effects of this type of investment fast.
- Make an
extra home mortgage payment (or two). Though you won't
feel the benefit immediately, doubling up on a mortgage payment
now can save you months of mortgage payments later.
- Donate to
a charity. Giving back to the community is a wonderful
way of supporting a cause that you are passionate about. Even
better - in many cases at least a portion of your donation is
tax-deductible too.
- Open a 529
College Savings Plan. A four-year college education can
cost upwards of $100,000. Save for your child's college education
with a 529 plan. It works much like a Roth IRA, and withdrawals
are completely tax-free when used for higher education purposes.
- Plan a vacation.
If you are in a fluid financial position, and can truly
afford a bit of luxury, do something you've been dreaming of.
Money is to be enjoyed as well as earned, saved, and invested.
Go ahead. Book that cruise.
Although all
the preceding ideas are excellent uses for a lump-sum amount of
cash, remember that instead of planning for a refund, it's best
to come out even. A tax refund is an interest-free loan to the government,
and money that is not in your pocket every month. If you have been
getting a refund back each year, consider changing your withholding
exemptions so less tax is withheld from each paycheck. While a tax
refund may feel like a gift from Uncle Sam, it's not - it's money
that you have overpaid on your income taxes.
Steer Clear
of Tax Refund Anticipation Loans!
Refund Anticipation
Loans (RALs) are short-term cash advances that provide cash against
an anticipated income tax refund. RALs typically carry high interest
rates and may not get your money much quicker than working with
DUFCU! You can save time and money by e-filing your tax return and
having your refund directly deposited into your DUFCU account. According
to a recent report by the National Consumer Law Center (NCLC) and
the Consumer Federation of America (CFA), the average RAL fee for
a $1,980 tax refund was $75, and the average electronic filing fee
for that refund was $40 in 2002. These charges amount to an annual
interest rate of more than 220%. Compare that to any other loan—
and say NO to RALs!!
DUFCU members with
household incomes of $35,000 or less can avoid these high fees by
taking advantage of free income tax preparation services available
through the Volunteer Income Tax Assistance (VITA) program. Duke
Law School has trained VITA volunteers equipped to prepare and file
tax returns electronically. Check
dates and availability. |
