Getting money back from the IRS? It pays to put it to good use.
- As of mid-March, the average tax refund was $3,352.
- Financial guru Suze Orman has some key advice on what to do with that money — and it pays to follow it.
It’s questionable as to whether getting a large tax refund is a good thing. When you get a huge pile of cash back from the IRS, it means you gave the government a generous interest-free loan with nothing in return.
But the reality is that most people who file a tax return do wind up with a refund. And as of mid-March, the average refund was over $3,000 — not a small sum of money.
Financial expert Suze Orman thinks it’s important to not blow your refund, but rather, use it to better your financial picture. Here’s what she strongly recommends doing with that money.
1. Pump up your savings account
Boosting your savings account balance is perhaps the most important thing you can do with your tax refund — especially if you’re behind on emergency savings. As Orman says, “If your emergency fund doesn’t yet cover up to a year’s worth of living costs, now is a chance to add more.”
Now Orman’s suggestion of having a year’s worth of living expenses on hand in savings is a bit aggressive. Many financial experts will tell you that having enough cash to cover six months’ worth of bills is more than sufficient. But if you’d rather err on the side of extra protection, which Orman clearly advocates, then you may want to bank your tax refund to hit that target.
2. Fund your retirement plan
You’ll need money in retirement on top of what Social Security will pay you. It’s important to contribute to a retirement plan like an IRA during your working years.
This year, IRAs max out at $6,000 for savers under 50 and $7,000 for those 50 and over. If you normally struggle to hit that maximum contribution limit, your tax refund could make it possible to get there. That means getting to enjoy tax breaks, which IRAs are loaded with. And the sooner you fund an IRA, the more opportunity you’ll give that money to grow.
3. Pay off your mortgage if retirement is nearing
Many of us are used to making a monthly mortgage payment. But that’s an expense you may want to shed once you retire and move over to a fixed income. If you’re getting a tax refund, Orman thinks using it to pay off your home is smart.
“It is so very smart to get rid of the mortgage payment before you retire,” she insists. While you may not feel compelled to make extra mortgage payments if you’re years away from retiring and are on track to have your home paid off by then, you may want to follow Orman’s advice if retirement is nearing and you still have a sizable mortgage balance.
4. Tackle important maintenance projects
Taking care of your car and home could help you avoid costly repairs and headaches down the line. If there’s a specific maintenance item you’ve been putting off due to a lack of funds, it pays to use your tax refund to get back on track.
5. Boost your job skills
It sometimes takes money to make money — or more of it, at least. That’s why Orman thinks using your tax refund for career advancement purposes makes sense. “Whether it’s a course taught online or at your community college, or a series of appointments with a career coach, focusing on your career advancement is a great investment,” she insists.
Tempting as it may be to take your tax refund and go on a fabulous vacation, it pays to listen to Orman’s advice. A vacation or similar splurge might offer some instant gratification — but the above moves could set you up for years of financial success.