Check out these four tricks used to get you to spend more (without you knowing it).
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Last year, the IRS wrote $306 billion in tax refund checks, with the average refund clocking in at a little 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 37% of Americans said they plan to save or invest their tax refunds this year. 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.
Some folks, about 27%, 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 $29,000, and we’re estimating interest at about 6.2%. With a monthly payment of $322, you’ll pay on that student loan for 10 years and shell out a total of nearly $39,000 in principal and interest.
If you put your entire $2,800 tax refund on your student loan balance, you’ll pay off your loan one year and three months sooner and save more than $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. 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 three years and five months instead of 10 years. And you’ll save $8,600 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: Current average credit card debt per household is $15,762 at 15.16% interest (holy cow!). At the minimum payment of 4% of the balance, it will take you more than 13 years to pay it off. But, if you pay $2,800 on the balance when you get your refund check then increase your monthly payment by $233, you’ll knock that sucker out in 17 months! Plus, you’ll save yourself $5,600 in interest!
Car loans: The average used car loan is $18,850 at 8.8% 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 $3,000 in interest.
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Home loan: The average mortgage balance is $168,200 with a 4% interest rate and a 30-year term. With your tax refund and increased monthly payment, you’ll pay off your home more than 11 years early and save almost $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 their full emergency fund, their tax refund can do great things for their 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 $83,800 of your money and more than $465,000 growth. That’s one way to catch up if you’re feeling behind on your retirement savings goals!
Maximize Your Refund With Expert Advice
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 pro 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. Get in touch with your tax professional today!