What Could You Do With Your Tax Refund?
In 2018, the average income tax refund in the United States was $2,727. That’s definitely not chump change. It might give you the extra financial boost you need to afford a well-deserved vacation or pay off some debt. Or, maybe you prefer to stash the money in savings for a rainy day.
Whichever path you choose to take with your refund, we're taking some time this tax season to help you make it count. After all, your financial goals are our top priority. Here's a quick list of options to consider when making the decision for what to do with your tax refund.
1. Set up or strengthen your emergency fund
We don't like to think much about it, but the unexpected can happen to us at any time. How much money would you need if you lost your job and had to spend the next few months looking for a new one? Or, what if you suddenly found yourself with unexpected medical bills? Having an emergency fund of three to six months of living expenses is ideal. If that's not realistic, consider your tax refund as a good place to start. Set the cash aside in a separate account from your existing savings account, or pad your savings with the extra boost. Also consider opening a new account with a higher rate of return, such as a money market account or CD – more on that below.
2. Pay off debt
Got a high-interest credit card or loan with a steep monthly minimum payment? Your tax refund can give you some much-needed breathing room in this battle. Let's say you make a large payment on an auto loan, student loan, or credit card. When you do this, the interest you owe on that balance also goes down. Guess what that means? Not only might it result in a potentially large savings on your interest, but it could also mean a lower monthly minimum payment going forward. Even just using your refund to cover an extra $1,000 in debt can save you a significant amount in finance charges down the road.
3. Save the money
Encouraging smart savings strategies is something we love to do for our members, and a tax refund can be a great way for you to get started. Consider the two options below:
- Money market accounts
BECU Member Advantage Money Market accounts and higher balance money market accounts earn a higher rate of return than a standard savings account and are NCUA insured. These accounts have no minimum balance requirements and no monthly maintenance fees, and they're especially beneficial if you have a high balance in your existing savings account. See our current rates and more information on Money Market accounts here.
Need a little more structure in your approach to saving? CDs have specific fixed terms and fixed interest rates. You can also choose your own term and maturity date on the amount you want to invest. One popular way to invest in CDs is to do what's referred to as a “CD ladder.” How it works: Let's say your tax refund is $2,500. By opening five separate CDs with different maturity dates, you'll have access to some of your money every 12 months as each CD matures. Here's an example of what this would look like:
- $500 in a 12-month CD
- $500 in a 24-month CD
- $500 in a 36-month CD
- $500 in a 48-month CD
- $500 in a 60-month CD
When each CD matures, you can take your money out if you need it, or renew the CD into a five-year term to earn an even higher rate. This can be a great way to get more out of your original investment. Read more about our CD options here.
4. Invest the Money
Got a retirement account with your employer? Consider increasing your contribution to your 401(k) or Roth/Traditional IRA. This can make a big difference if you have the hope of retiring earlier. Plus, depending on the type of account you have, contributions are deducted from your salary on a pre-tax basis, which can help you get a higher tax refund the following year. This allows you to contribute more to your retirement account on a yearly basis.
BECU Investment Services* offers a full spectrum of investment management and retirement planning products and services. We're here to help answer questions and guide you to a smooth retirement. Schedule a complimentary consultation with one of our financial advisors to gain a better understanding of your options.
No matter what you decide, keep in mind we've developed an online tax center to assist you with doing your taxes. Check it out here and find out how you can get $20 off TurboTax!
*Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Insurance Products offered through LPL Financial or its licensed affiliates. BECU and BECU Investment Services is not a registered broker/dealer and has a brokerage affiliate arrangement with LPL Financial. Investments are:
Branch Office located at BECU, 12770 Gateway Drive, Tukwila, WA 98168.
BECU, BECU Investment Services and LPL are separate entities. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of all 50 states.