Taxpayers, rejoice: You tax refund may be on its way — or even with you already.
If you're one of the early birds who filed soon after tax season opened on January 27, you may have already received your refund in your bank account. And if you're among the millions of taxpayers who claimed the additional child care credit or the earned income tax credit, you may start to see those refunds arrive in early March.
For many people, tax refunds can be a significant source of extra cash. Though that's exciting, if you're unsure of how best to make use of your return, receiving a lump sum can also feel a little daunting.
Tax season is a good time to assess your financial health and chart a course to achieve your money goals — and make any adjustments that can benefit you next season.
Here are two smart moves to make as soon as you get your refund.
In 2019, the average refund was just under $3,000, according to the IRS. That's equal to about three weeks worth of pay for the average American full-time worker, who earns a median $908 per week, according to data from the Bureau of Labor Statistics for the second quarter of 2019.
Getting that kind of money all at once can trigger the urge to spend. Instead, try to set aside a small amount for fun and splurging and use the bulk of your tax refund to help you get closer to any number of financial goals, from paying off debt to saving for retirement.
- Pay off debt: If you have credit card debt or student loans, start there: putting that refund toward the loans that have the highest interest rates, and making sure that extra money goes towards paying down the principal. Experts say this move will help you eliminate your debt faster and pay less in interest over time.
- Start an emergency fund: Next, if you don't have one already, consider using your refund to start an emergency fund. Experts recommend putting away enough money to cover 3 to 6 months of expenses in a checking, savings, or money market account.
- Save for retirement: Consider putting all or part of your refund in a retirement account, such as an IRA or a 401(k). If you get the average return of around $3,000 and put that amount in your IRA, you'd be about halfway toward the annual contribution limit.
If you're not sure how to best use your refund, or you hope to increase your financial literacy in general, consider scheduling a session with a certified financial planner who can help you map out ways to reach your future money goals.
Video by Courtney Stith
If you received a hefty tax refund, the next thing you'll want to do is figure out why you got that amount back in the first place. It may mean your withholding was off and in that case you may want to adjust the amount of federal tax your employer withholds from your paycheck.
It may seem counterintuitive, but experts say that money could work harder for you if you receive it in regular installments throughout the year instead. Sure, a big refund can give you a head start on reaching your financial goals. But if your plan is to save or invest that money anyway, then putting away a little bit from each paycheck instead of receiving it in one lump sum can make a big difference, thanks to the effects of compounding interest.
You can find everything you need to know on the subject in our guide to adjusting your withholding.
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