- Avoid refund anticipation loans (RAL). An RAL is an extremely high-cost bank loan secured by your pending tax refund, which you have to pay back even if you don’t get a refund. If you’re looking for a quick refund you can get it within two weeks or less by efiling and having the refund directly deposited into your account. Also consider the Volunteer Income Tax Assistance (VITA) program and AARP’s TaxAide – both offer free tax preparation for low-income taxpayers.
- Pay down credit cards or other high interest loans. Use your refund to pay more than the monthly minimum payments. Add extra cash to loans with high interest rates. Remember, credit card debt is simply an unsecured loan. The longer the life of the loan, the more you’ll pay for borrowing the money. If you can’t pay them off completely, make an extra payment. By making an extra credit card payment you can reduce your interest costs.
- Pay down your mortgage. Any extra payments go toward paying down your principal. Paying off your mortgage faster means you pay less in interest. Using your refund to reduce your mortgage debt can mean substantial long-term savings. Just by making two extra payments a year, you might be able to pay off your loan in 15 years on a 30-year mortgage.
- Contribute to or open an emergency fund. Most people don’t have money stashed away for unexpected emergencies. Your tax refund is a great way to start. The NFCC recommends saving three to six months of living expenses. By placing the cash in a separate savings account or short-term CD, you’re going to be less likely to use it and it will be there in case of an emergency.
- Invest in retirement. Many people are working after the normal retirement age of 65 and it is estimated that a majority of workers believe they are behind on their retirement
NFCC Tips on Your Tax Refund Savings
Whether it’s your 401(k), IRA or Roth IRA, investing your tax refund now could mean a nicer cushion later. The sooner you start saving the more time your money has to grow. Make retirement savings a high priority by setting goals for yourself, devising a plan, and sticking to it.
- Service the car and tackle other to-do’s. If you’ve been putting off getting an oil change, cleaning the gutters or fixing the leaky roof – now’s the time to cross those things off your list. Using your tax refund to maintain your expensive possessions now could save you money in the future.
- Open a 529 College Savings Plan. A college education isn’t getting any cheaper. With 529 College Savings Plans withdrawals are tax-free when used for higher education. Plus, some plans come with tax benefits.
Gail Cunningham is Vice President of Membership & Public Relations with the NFCC.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.