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The average IRS tax refund is nearly $3,000: Make the most of that money with this 3-step plan

“Paying yourself first should always be a top priority.”

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Taxes are due on April 15, but the sooner you file, the sooner you could get your refund. The average 2021 payout so far is $2,880, according to the IRS. The average direct deposit refund is slightly higher.

Almost three in four taxpayers got refunds last year when the average payout was over $3,100. And a cash payout is just what many Americans need now as the pandemic has made money tight.

While the amount you may receive depends on your individual circumstances, it makes sense to set aside a portion to address any financial concerns you otherwise may have had to put off, as well as to save for the future. "Every individual's situation is unique, but generally speaking, paying yourself first should always be a top priority," says Adam Murray, CFP, a financial advisor at Berman McAleer.

Here's a smart, three-step "pay yourself first" plan to make the most of your tax refund, according to personal finance experts.

1. Pay outstanding bills and build an emergency fund  

Saving for an emergency is especially important right now if you've lost income. But don't ignore your bills or immediate expenses like housing and food in order to save faster. Focus on the necessities first while stashing away what you can for an emergency next, experts say. Then you can move on to goals like saving for retirement or buying a home.

"If someone is receiving a tax refund, the very first thing they should do is, if they don't have one already, establish an emergency reserve," says Howard R. Pressman, CFP, a financial planner and partner at Egan, Berger & Weiner. "This is the foundation from which the rest of a solid financial plan is built."

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Aim to put away at least three to six months' worth of living expenses toward an emergency account and consider setting up automatic transfers to stay on track with your goal. If that amount of money seems like a lot to set aside, you can aim for more personalized, bite-size goals.

If you can manage to save $1,000, that can be a good start. And if you can make it to $3,500, which is the typical cost of an emergency, according to Bankrate, you can feel even safer.

2. Save money for retirement  

When your essentials are taken care of and you have a comfortable amount for an emergency, the next best thing to do with your money is save for retirement, according to experts.

Many vehicles like 401(k)s, Roth IRAs, and traditional IRAs offer compound interest to help your funds grow. That means you earn a return on your money and on the interest it accrues. Experts suggest trying to preserve about 15% of your monthly income for your financial future.

Lots of Americans did that in 2020. Despite the pandemic, the average individual retirement balance hit a new record, according to recent data from Fidelity. The average 401(k) balance jumped 8% to reach $121,500 at the end of the year. IRA balances hit $128,100, an 11% spike from 2020, and typical 403(b) balances hit six figures for the first time.

A great place to start investing is through an employer-sponsored retirement plan at work, says Murray. "The earlier you start, the more opportunity to benefit from compounding interest," he says. "Once you've established a cash savings and are comfortable with your debt management plan, focusing on investing for the future is a logical next step."

Try Grow's retirement savings calculator to get a sense of what your goal should be.

3. Pay down debt  

As of November last year, the average American had fallen $7,512 deeper into debt, bringing total nonmortgage debt to a striking $41,559 for the typical person, Clever data shows.

Lingering debt can harm your credit score and make it harder for you to land a deal on a home or a new car. If you have high-rate debt such as personal loans or credit card debt, experts recommend you prioritize paying it down.

If you can, try to save and pay back loans at the same time, Murray says: "Allocating a portion of your discretionary cash to reduce high-interest debt while also directing funds towards replenishing emergency savings or starting to save for retirement will benefit your near-term and long-term financial wellness."

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