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As we quickly approach the extended tax deadline until May 17, Americans who have not yet filed a claim are busy sorting out the paperwork – and many in return expect a significant refund.
According to latest tax administration data, over 70 million refunds have been returned so far in 2021, with an average tax refund of $ 2,873.
Although the tax refund is basically the money you overpaid to the government in 2020, it is easy to understand it as free money and you deserve to brag. After the year we just had, rightly so.
“After a long year in which routine activities were often not allowed, it’s tempting to spend a tax refund on casual entertainment – and you can certainly set aside a portion of your share for that!” says Corbin Blackwell, CFP in a robo-advisor Better.
But before you spend that cash in one go, take a minute and think about how nearly $ 3,000 could affect your overall financial picture. Select he talked to two financial advisors about how best to use that unexpected money. Here is their advice.
Give priority to tax refunds according to emergency savings, Blackwell says. This may interest you : What Are the Roth 401(k) Withdrawal Rules?.
“If you don’t save at least three months, I would put your tax return first and foremost,” Blackwell tells Select. “The past year has shown us how important it is to have cash available for the unexpected.”
An emergency fund is basically a safety net of savings that should only be used for unforeseen expenses, such as a sudden car repair or a sudden medical bill. If you have savings in emergencies, you are helping yourself to afford these types of purchases, and at the same time it gives you peace of mind if you lose your job unexpectedly.
Most financial advisors recommend that you save on living costs within three to six months a high-yield savings account, but most people don’t have that much savings right away. The most important thing is to start spending a little money each month so you can create a fund.
If you can’t / don’t want to hide the entire tax return on your emergency savings account, just start with $ 200 or $ 300 and make a plan to save more each month in the future.
Here’s where you can put your savings in an emergency
High yield savings accounts may reduce their APYs offered in response to a reduction in Fed rates in the midst of a pandemic, but still outperform returns traditional savings. If you are going to put money into any savings account, opt for one that brings you more than the APY average.
Marcus by Goldman Sachs High Yield Online Savings offers 0.50% APY with no monthly fees and no minimum deposits.
To be able to earn even more, consider Varo savings account (also with zero monthly fees and zero minimum deposits). New users start earning 0.20% APY, but can then increase that rate to 3% APY if they meet the conditions below in each qualifying period:
- Make at least five qualified purchases of Varo Bank Visa® debit card I
- Receive qualified total direct deposits of $ 1,000 or more
You will also need to meet your daily balance requirements:
- Do not exceed the daily savings balance of $ 5,000 for the entire calendar month
- The balances in your Varo bank account and in your Varo savings account remain greater than or equal to $ 0
Generally, credit card issuers charge high interest rates when you wear a balance from month to month. According to the average APR on a credit card of 16.28%, according to Latest Federal Reserve dataThe unpaid balance can quickly bubble up.
“Any debt with an interest rate greater than 5% would be what I would consider a top priority for disbursement,” Blackwell says. Read also : 4 Ways a Roth IRA Is Icing on the Retirement Cake | Personal-finance.
Most card issuers charge a daily interest rate on your outstanding balance, so the sooner you pay it off in full, the better. If your credit card debt is greater than your tax refund, you may want to use all of your refund to pay it off, then transfer the remaining balance to credit card to transfer balance with introductory 0% APR period. This way you have more time to settle the debt without having to worry about extra interest.
Most cards charge a balance transfer fee of about 3% of the balance you transfer (at least $ 5), but Wings Visa platinum card stands out as a transfer of balance free of charge option. Cardholders receive 0% APR for the first 12 months of purchases and balance transfers (after a variable APR of 8.15% to 18.00%).
For those who already have adequate savings and no credit card debt, you may want to invest your uncollectible money (or part of it) in a retirement account such as an IRA or Roth IRA.
“If you’re sitting on cash from a tax refund, put it to work on an account that qualifies for retirement and let it grow over time,” says Michaela McDonald, CFP in the Savings and Investment app. Albert. “The sooner you can determine retirement funds, the better.”
When planning your future, invest in applications like Albert and Personal capital (one of our top rated) can certainly help you imagine how far you are toward achieving your savings goals, but there are other resources if you need more personalized attention. You can give advisors and financial planners access by applying for membership plans through companies such as Financial gym i Ellevest.
Whether it’s a much-needed vacation or saving for a deposit at home or a new car, McDonald suggests that a tax refund help you move toward your larger goals. On the same subject : Best Expert Money Advice for Boomers – GOBankingRates.
You can use high yield savings like Ally Online Savings Account create different bins for each goal and determine the portion of the tax refund for each.
Annual Percentage Yield (APY)
There is no monthly maintenance fee
Maximum number of transactions
Up to 6 free withdrawals or transfers per cycle of statements * Restriction of withdrawal from cycle 6 / exemption is during coronavirus outbreaks according to Regulation D
Excessive transaction fee
Offer a current account?
Offer an ATM card?
Yes, if you have an Ally checking account
With an average tax refund of $ 2,873, you may be able to allocate that allocated money to several different areas. Prioritize urgent savings and high-interest debt, and then focus on directing some toward pension funds or other financial goals.
It’s okay if you spend part of that on something fun as well. Maybe you should think about it rule 80/20: Put 80% of your return on one of those bigger goals, and 20% on something you can enjoy right now. With a return of $ 2,873, which would be over $ 500 to spend on your needs, which is a pretty nice part of the change.
Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article are the opinions of the Select editorial staff only and have not been reviewed, approved or otherwise approved by any third party.