Tax season is in full swing and around this time each year, millions of Americans are contemplating how to spend their tax refunds. According to the IRS, more than 70 percent of taxpayers expect to get tax refunds this year. Last year, 111 million refunds were issued, with an average refund of $2,860.
No matter how much of a refund you receive, you worked hard for that money and need to determine how to make that money work hard for you. Here are a few things to keep in mind when deciding what to do with your tax refund.
Do you have enough saved for emergencies?
Shelling out money for car or home repairs is no fun, but it’s even more disheartening if you haven’t set aside money and end up paying interest on a credit card or loan to fund an emergency.
You can prepare for unexpected expenses by setting savings goals. Experts recommend saving 6 months of expenses for an emergency fund. If you need help knowing how much should be in your emergency fund, this calculator can help.
Depositing your tax refund in a savings account with a bank that pays a competitive interest rate and doesn’t charge monthly maintenance fees is one way to get off to a great start. A money market account, which offers you the ability to earn good interest, plus a debit card or checks, allows you a great balance of growing your savings while allowing quick access to the funds in an emergency.
Are you saving enough for retirement?
You’ve heard it before but it bears repeating: Americans simply aren't saving enough for retirement. Pension plans are all but disappearing, and even if you’ll collect social security you should bolster your monthly income with savings to ensure a comfortable retirement.
At Ally Bank, Member FDIC, we see trends among our customers at tax time related to retirement savings and a desire to establish a foothold toward enhancing their long-term financial well-being.
Individual Retirement Accounts (IRAs) aren’t just for people with large sums to invest. IRA products offer a wide variety of investment choices, flexible options and terms, and come in many forms, such as a Roth (after tax) or traditional IRA and savings, money market and certificates of deposit. Ask your tax advisor what makes the most sense for you.
With IRA CDs, you choose the term, with high yield IRAs offering the better interest rate. We find that most of our IRA CD customers choose longer term, higher yield products like our 5-Year High Yield CD. There are also step-up CDs that allow savers to start with a great rate, plus have the opportunity to increase their rate, which could come into play in the rising rate environment we see today.
No matter which of the IRA options you choose, make sure it is a product that will grow your money faster with competitive rates, interest compounded daily, low or no fees, and FDIC insurance.
Are you saving for your children’s education or other long term goals?
As we go through life, there are a lot of things that require saving for a goal. You may need a down payment for a home, or maybe you have children who will want to go to college in the future. Using your tax refund to save for one of those goals can be a great first step.
It’s important to develop a savings plan for long-term savings goals for big life events like buying a car, a home or establishing a college tuition fund. We offer online resources at https://www.ally.com/education/financial-life/ to guide consumers on how to plan for the major milestones and shorter term goals like childcare, health insurance or a vacation.
If you aren’t on track with the goals that matter to you, using your tax return to start funding them can be a small way to take a big leap towards financial well-being.