Saving at Tax Time

John Gower, Analyst, NerdWallet

Each year, about 75% of Americans who file tax returns receive a refund. According to a survey conducted by the National Foundation for Credit Counseling (NFCC), more than half of those receiving refunds (58%) intentionally plan it that way.

 

So if you are a member of the group that’s been giving Uncle Sam an interest-free loan every year, what are you going to do with that money? Spend it? The average refund is about $3,000. That’s a serious chunk of change that would be better put to use in other ways.

How to maximize the value of your refund

Here are 4 simple ways to spend your tax refund that will improve your personal finances far more than a new wardrobe.

Pay down debt

Are you carrying a credit card balance? Pay it off if you can. If not, making a substantial payment will still lower your future monthly payments considerably. If you have more than one credit card to pay, pay the one with the highest interest rate first. Or, if your credit cards are under control, plunk down a big payment on your car or your mortgage.

Build up an emergency fund

Just like you wouldn’t leave the house on a cloudy day without an umbrella, you shouldn’t be without an emergency fund. Experts recommend setting aside at minimum enough to live on for six months, or a year if you have a family. This is money that should be kept accessible, so you can tap into it if you have unanticipated big expenses for home repair, medical care, or you find yourself suddenly unemployed.

Start or add to your IRA or 401(k)

IRAs and 401k plans are opportunities to put aside money now for retirement purposes. Since these plans are tax-advantaged, they are even more valuable than a typical savings or investment account. So if you’ve been avoiding retirement contributions lately, or have not even started a retirement plan yet, you could use your tax refund to turn that around in 2014.

Improve your insurance coverage

Are you squeezing by with little (or no) insurance coverage for your home, car or even your health? Then your tax refund may be best invested in an improved insurance policy for your family or property. Your monthly premiums will rise, but in the event of a catastrophe, you’ll be happy for the added cushion.

Just make sure to fully research your options and consider your personal situation. More expensive coverage may or may not make sense in all cases. For example, a healthy young adult may not need a premium health insurance plan but could benefit from better auto insurance if they rely on their car for work or school.

Rethink your withholding status 

Now that we’ve given you some ideas on how to better use your tax refund, let’s float this idea: Why are you giving Uncle Sam an interest-free, 12-month loan? A $3,000 refund essentially costs you about $250 per month – money you won’t earn interest on and won’t see until sometime the next year.

What if you kept that money and saved it each month instead? Your $250, invested monthly in a savings or brokerage account would actually grow in value over the year. So perhaps you should consider adjusting your withholding to be more in line with what you actually need to pay in taxes and plan to break even with the IRS for 2014.

Tip of the Day

  • Written by Katie Bryan | November 26, 2013

    Let this be the year that you put an end to bringing in the New Year with financial guilt and stress. http://ow.ly/fzUIQ

Saver Stories View all »

Start Small and Keep on Saving

Written by Super User | March 6, 2012

Although Major James Kenisky only recently took the Saver's Pledge, he has been living by its tenets for many years: Start Small. Think Big.

Starting Small

I want this story to help others and I am certain I am not the only one who has achieved the level of success in the military that I have.  I am just one voice.  I started saving when I became a Second Lieutenant in the United States Air Force.

Read more...

One That Almost Got Away

Written by Super User | November 26, 2010

Brody Lockwood - Like a typical fledgling, I started down the track of financial indebtedness. Nineteen years old and nothing to lose. Credit - who need it? Savings - that was for older people with responsibility. Debt - my parents were in debt ergo it must be OK. When I was eligible for reenlistment, I reenlisted for a multiple of 3 worth $15K. I was happy to pay off my debt, but would I be able to stay out of debt?

Read more...

Making Savings a Part of Marriage

Written by Super User | November 26, 2010

Capt. Rob Eckhardt is the first to admit that he hasn’t always been responsible with money. But less than 10 years after a rocky start to saving, Eckhardt reports that he and his wife are free from credit card debt, have a down payment on a home, and are saving regularly for retirement. And, as the Military Saves representative for his Air Force squadron, he’s helping others make similar progress.

Read more...