While the pandemic impacted everyone in one form or another, the average tax refund, projected at $2,873, is tracking closely to what it was last year, according to the IRS.
If you got a tax refund, what should you do with it? Erin Green has some suggestions.
Green, a senior wealth strategy associate at UBS Wealth Management USA, 300 E. State St., Redlands, outlines five strategies to best leverage your tax refund:
1. Beat back debt: Having to continually pay large interest charges on credit card balances and loans can make it tough to get ahead financially. A good use of your tax refund might be to reduce or eliminate your debt. You might pay down cards with highest interest rates first, while making minimum payments on others.
2. Plan for the unexpected: Life is full of unexpected events that can be expensive. Having an emergency fund can help you to prevent from relying on credit cards to pay for them. If cash is tight and you are using credit, you might end up paying interest on the money you borrowed for a long time. You can use your tax refund to start or add to your emergency fund. Ideally, you should have enough in the emergency fund to cover at least three to six months of living expenses.
3. Save for education: Consider using your tax refund to jump-start, or add to, a college education savings program for your children or grandchildren. College tuition is expensive and is likely to continue to go up.
4. Boost your retirement nest egg: Every little bit helps when it comes to saving for retirement. One strategy is to have less income tax withheld from your pay in future years, so you won’t receive a big tax refund. Better yet, increase your contributions to your employer’s retirement plan to save even more.
5. Have a little fun: Depending on the amount of debt you have, you might also consider using a small portion — such as 10% or less — of the refund to make a purchase you have been eyeing that will bring you enjoyment.
An option to consider could be taking a vacation, but it is most important to not to go beyond your means.
What about investing in the market? Is now a good time?
“It’s always a good time to invest,” said Green. “Markets generally tend to go higher over time, and this statistical edge generally increases over time.”
Regarding investing tax refunds in the market, Green recommends investing now, rather than employing a simple “lump sum” strategy of investing all at once.
Green’s comments are for educational purposes only and should not be relied upon for investment advice or for making any investment decisions. To find out more about USB Financial Services, visit usb.com.