Spring is here -- and that means it's tax time.
Whether you've already filed or you're still avoiding the process like the plague, take solace in the fact that approximately three out of four taxpayers receive a refund. And most people are surprised to learn how sizable that refund actually is -- for the 2013 season, taxpayers got back an average of $2,755, according to Internal Revenue Service data.
In the coming months, taxpayers will have to decide what to do with their refund. A recent National Retail Federation survey found that approximately one in 10 taxpayers plan to use their refund to invest in a major purchase, and nearly 15 percent will splurge on a vacation. But before your mind drifts to visions of a European cruise or a new 70-inch television, stop and think about the long-term potential of these funds, rather than just the short-term value. The single biggest mistake most people make with their tax returns is being too shortsighted.
Whether you're receiving a $10 or $10,000 tax refund this year, here are three ways to put that money to good use and make sure it lasts longer. The ideas come from Better Money Habits, a website developed by Bank of America in partnership with Khan Academy, to provide simple answers to key financial topics in a fun, yet informative manner.
• Pay off debt - Most Americans owe money in some capacity and a tax refund is a great way to make a significant dent in that debt. According to January 2014 Federal Reserve statistics, the average U.S. household owes $15,270 in credit card debt and $32,258 in student loans, in addition to the car loan that most Americans have. To maximize the impact you can make with your refund, use the money toward the loan or credit card with the highest interest rate and make sure to also make your regular monthly payment. Paying more than your minimum payment goes a long way to paying down debt quicker.
• Develop a financial safety net - According to a Bankrate.com survey, more than 25 percent of Americans have no emergency fund and 75 percent don't have enough savings to cover their bills for six months. Whether it's a minor situation, such as leaky roof, or something as big as losing your job, it's always a good idea to have enough funds cover the unexpected and live comfortably. As a general rule of thumb, aim to build a safety net of nine months worth of expenses. To learn more on how to calculate monthly expenses and build a safety net with your tax return, check out this video.
• Invest it - Whether you choose to prepare for retirement or education expenses or expand your portfolio with stocks and bonds, investing your refund could provide the potential for your money to grow. In many investment strategies, starting early can pay off as compound interest -- the ability of your assets to generate earnings which are reinvested to generate their own earnings -- can really work in your favor. Picking which investment is right for you depends on your personal financial situation, taking into account how soon you will need the money and how much risk you are comfortable with taking. And keep in mind that unlike bank deposits, investments are not insured by the FDIC.
Your tax refund is a great way to make progress against your financial goals. You can make the most of your return by simply taking a long-term view.
It's also never too early to start thinking about next year. Check out the calculating federal income taxes video at BetterMoneyHabits.com to gain a better understanding of how your taxes are calculated, and learn how to maximize your refund for 2015.
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