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Last year, the IRS reported giving out almost $318 billion in tax refunds, with the average refund clocking in at more than $2,800. 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 41% of Americans said they plan to save or invest their tax refunds this year, according to a GOBankingRates survey. That’s a much more responsible option than frittering it away on vacations or some other spending splurge. But while we’re all for building up a cash cushion, socking your refund away 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 38%, plan to use at least part of their tax refund to pay off debt. We ran some numbers to find out what would happen if you used your entire refund to pay down your debt based on debt totals for the average American household. 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
First up: student loan debt. The average student loan balance is over $30,000, according to the Federal Reserve, 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.
If you put your entire $2,800 tax refund toward your student loan balance, you’ll pay off your loan 14 months sooner and save nearly $2,000 in interest.
Now, let’s take things a step further. A $2,800 tax refund isn’t really a windfall. It’s simply the government giving you back 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. You’ll pay it off in four years and eight months instead of 10 years. And you’ll save $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:
Credit cards: Households with debt currently owe an average of $16,748 in credit card debt, according to a study by NerdWallet. Holy cow! At the minimum payment of 4% of the balance, it will take you almost 14 years to pay it off with a 15% interest rate. But, if you pay $2,800 on the balance when you get your refund check and increase your monthly payment by $233, you’ll knock that sucker out in 21 months! Plus, you’ll save yourself $5,600 in interest!
Car loans: The latest Experian research shows that the average used car loan is $19,329 at 8.5% interest. 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 your wheels off in about half the time and save more than $1,700 in interest.
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Home loan: The average mortgage balance is $176,200 with a 4% interest rate and a 30-year term, according to NerdWallet. With your tax refund and increased monthly payment, you’ll pay off your home more than 10 years early and save over $50,000 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 get rid of your debt. For folks who are out of debt and have three to six months of expenses saved, their tax refund can do great things for their retirement account. Plus, your tax consultant can help you adjust your withholding so you keep more of your money every month!
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 $465,000 of growth . That’s one way to catch up if you’re feeling behind on your retirement savings goals!
Maximize Your Refund With an Expert Tax Consultant
The first step to this plan, however, is making 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, and you can 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!