It’s tax time again, and for those of us that receive a little windfall income in the form of either a tax refund or Earned Income Tax Credit (EITC), this can be an exciting time to focus on saving. In fact, of those Americans who will file a tax return this year, about 75 percent will receive a refund. According to a survey conducted by the National Foundation for Credit Counseling (NFCC), the average refund will be around $3,000. This amount of money, if put to proper use, can make a positive impact on anyone’s financial situation.
Pay down some debt! Did you know that using your tax refund to pay off higher interest debt is a form of saving? A survey completed by the National Foundation for Credit Counseling suggests that the debt that many Americans carry is a barrier to growing personal savings! Bruce McClary, Spokesperson for the NFCC explains that “Placing debt repayment on a faster track while reducing reliance on credit cards and loans will bring people closer to resuming progress toward reaching their personal financial goals.” Because of this it could be very beneficial to use at least a portion of your tax refund or EITC to pay down higher interest debts (such as a credit card). By paying off a higher interest debt, you will be saving money in the long run on the interest you’re paying to repay the original amount owed. If you have money left over after paying down the higher interest debt, you can then begin to consider paying down balances that have lower interest rates. Many Americans carry high interest debt, even while they have significant savings in the bank. Even though having emergency savings in the bank is a good idea and feels safe, paying off debt with existing savings will make it easier to keep and hold onto saved money in the long run.
Start an Emergency Fund! If you have paid off your debt, an emergency fund is a great way to prepare for events that are unplanned such as an illness, loss of a job, or other unavoidable financial strain. It is suggested that an emergency fund should contain anywhere from three to six months’ worth of income to help support you through hard financial times. In addition, the Association for Financial Counseling and Planning Education (AFCPE) explains that emergency funds should have two main criteria: 1) These funds should be highly liquid, such as a savings account, meaning you have easy access; and 2) These funds should be low in risk. The AFCPE goes on to explain that, “If the investment is too volatile, there is a chance the level of the asset balance may not be adequate at any particular time.”
Open or add to an IRA or myRA! By choosing to save at least a portion of your tax refund to an IRA or myRA, you will be helping set yourself up for financial security during retirement. Saving for retirement may be one of the most difficult savings challenges faced by many Americans. In fact, it is suggested that many Americans aim to leave the workforce in their mid-sixties, when the average life expectancy has grown far beyond that. This means that an individual’s years spent in retirement have steadily increased. Research suggests that many families considered moderate to low-income have very little retirement savings, if any. Because of this, it is imperative to focus on growing a retirement savings that will comfortably support you through your third act. Using an IRA or myRA can make your savings work for you since you will benefit from valuable tax incentives. It might be useful to speak with a financial advisor to make sure you are maxing out all your tax incentivized savings options. Tax time can be a great time to get started on achieving your retirement goals!