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Last year, the IRS reported giving out nearly $324 billion in tax refunds, with the average refund clocking in at almost $2,900.(1) Lots of early filers are already waiting to receive this year’s tax refund and are busy considering all the spending possibilities.
It might surprise you to learn that 22% of Americans said they plan to put their tax refunds into savings this year, according to a Credit Karma TaxTM survey.(2) That’s a much more responsible option than wasting it on some spending splurge. But while we’re all for building up a cash cushion, saving your refund for a rainy day may not be the best way to get ahead financially this year—especially if you’re still in debt.
Other folks from the survey, about 24%, plan to use at least part of their tax refund to pay off debt.(3) Based on the average American household debt totals, we ran some numbers to find out what would happen if you used your entire refund to pay down your debt. We knew the results would be positive, but you may be surprised by how much you could actually save with this one simple step.
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Your Tax Refund vs. Your Debt
The average student loan balance is over $30,000, according to the Federal Reserve,(4) and we’re estimating interest at about 6.2%. With a monthly payment of $336, you’ll pay on that student loan for 10 years and shell out more than $40,000 total in principal and interest.
Let’s say, after treating yourself to a nice dinner, you put the remaining $2,800 of your tax refund toward your student loan balance. This way, you’ll pay off your loan 15 months sooner and save over $2,000 in interest.
Now, let’s take things a step further. A $2,800 tax refund doesn’t mean you hit the jackpot. It’s simply the government returning your money—money you could have been using all year long to pay extra on your debt. Don’t wait until next year to get your money back. Work with a tax consultant to adjust your withholding today so you can bring home an extra $233 a month ($2,800/12), starting with your next paycheck!
Use that $233 to pay extra each month on the remaining balance of your student loan debt. With this method, you’ll pay it off in less than five years instead of 10. And you’ll save over $6,000 in interest!
That’s how you put a tax refund to work! Here’s how that same scenario can work on your other debts:
Households with debt currently owe an average of $15,654 in credit card debt, according to a study by NerdWallet.(5) Yikes! At the minimum payment of 4% of the balance, and with a 15% interest rate, it’ll take you almost 14 years to pay that off. But, if you apply $2,800 to the balance when you get your refund check and add $233 to your monthly payment, you’ll knock that sucker out in 20 months! Plus, you’ll save yourself over $5,300 in interest!
The latest Experian research shows that the average used car loan is $19,291 at 8.7% interest.(6) Most people finance their cars for five years, although the average term is creeping toward six. With your one-time $2,800 payment followed by your increased monthly payments, you’ll pay off your wheels two to three years sooner and save around $2,000 in interest.
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The average mortgage balance is $173,995 with a 4% interest rate and a 30-year term, according to NerdWallet.(7) With your tax refund and increased monthly payment of $233, you’ll pay off your home 10 years early and save $47,157.95 in interest!
Roll That Refund Into Retirement
As long as you have at least $1,000 in a starter emergency fund, there’s no reason not to use your tax refund to pay down your debt. For those of you who are out of debt and have three to six months of expenses saved, your tax refund can do great things for your retirement account.
With an initial investment of $2,800 followed by monthly contributions of $233, you could add $555,000 to your nest egg over 30 years! That’s a total of $86,700 of your money and more than $468,000 of growth. This is one simple way to catch up if you’re feeling behind on your retirement savings goals.
Maximize Your Refund With an Expert Tax Consultant
None of this is possible, however, unless you make sure you get back all the money Uncle Sam owes you. An experienced tax professional will spot deductions and credits you may not know about, and they’ll help you get your largest refund possible. Then, your tax consultant will help you adjust your tax withholding so you aren’t giving the government a tax-free loan each year. It’s time you put your money to work paying off debt or investing for a secure retirement.
We can put you in touch with a tax expert Dave recommends in your area so you can get going on your debt snowball or retirement fund as soon as possible. Find a tax consultant near you today!