Hopefully by now you’ve completed and filed your income tax returns, and are eagerly anticipating a juicy refund, which, according to the IRS, should average around $3,000.
Sure, you could spend that money on a new TV or a well-deserved vacation. But here are some money-smart ways to use your refund for a more rewarding purpose.
1. Pay off high interest debt
The average credit card interest rate hovers around 15% right now, so if you apply your theoretical $3,000 refund to an account balance billing that rate, you would save yourself $450 in interest per year.
Reducing what you owe could also improve your credit score, which means you may not only be more likely to get a loan if you apply for one in the future, but at more favorable terms, as well.
The higher credit score could also help you save money on homeowners and auto insurance premiums, and even positively affect your employment prospects.
2. Refinance your mortgage
It’s no fun to spend your refund on closing costs, appraisals, and other fees buried in that stack of documents you have to sign to get a new mortgage.
But interest rates are still near all-time lows, valuations are the highest they’ve been in a while, and the lenders are more friendly than they’ve been for several years.
You might be able to lower your interest rate and/or your monthly payment. But a new mortgage may also allow you to borrow extra cash from your equity now at a very low rate, and then pay it off very slowly over the next thirty years.
This move has extra appeal if you have some upcoming uncovered expenses in your future, such as home remodeling or higher education costs.
3. Save for retirement
If you’re not maximizing your pre-tax retirement plan contributions at work or in an IRA, the $3,000 put towards these accounts could save you several hundred dollars on your 2015 tax bill (increasing your refund even more).
Best of all, the deposit is still your money, and may even earn you more money before you take it out in retirement.
Concerned about locking that money up for a long time? Then use a Roth IRA (if you qualify). You won’t get a tax break on the deposits, but the contributions can be withdrawn at any time for any reason with no taxes or penalties whatsoever.
In retirement, the withdrawals will likely be free from taxes. In the meantime, any earnings or growth on the money invested within the Roth IRA will be sheltered from taxation.
4. Prepare your estate plan
Most of us don’t have an updated will, let alone the powers of attorney, beneficiary designations, living wills, and other worrisome-but-necessary legal papers.
The lack of a proper estate plan doesn’t make it any less likely that you’re going to die. It just means your death will subject your family and loved ones to even more agony than they would endure if you had planned ahead.
You may be able to prepare your own basic documents online at a place like nolo.com. But you’re probably better off investing your refund in visiting a real, live, human lawyer who specializes in estate planning.
Go to avvo.com to find one in a particular city or region.
5. Provide for your family
Speaking of uncomfortable planning topics, you may also want to use your refund to protect your family from a financial loss if you die too soon.
Term life insurance is usually the best way to pay for their needs if you and your income go away. $3,000 can pay for a 20-year $100,000 term life insurance policy on a healthy 30-year old non-smoking male, by paying twelve bucks a month for twenty years.
A female of the same age and health can get a $150,000 policy for about the same amount. Visit term4sale.com for more information and options, and be safe at least until you get the insurance policy in place.