Tips on spending your tax refund
It’s that glorious time of year again when many Americans are receiving money back from the state and federal governments.
According to the Internal Revenue Service as of April 12th, the average dollar amount Americans are receiving this year is $2,902. Experts advise, however, to resist the urge to spend it all in one place. Sure, buying a couple days at the spa or tickets to the Super Bowl may seem like a fun idea now - but it’s probably a better idea to skip the indulgences.
Here are some tips on how to maximize the amount you're getting back:
Invest in your future
Alexandra Lebenthal, CEO of Lebenthal & Co., a New York City-based financial firm, advises to invest a portion of your tax return into an Individual Retirement Account.
Under federal law, you can put up to $5,500 a year into an IRA, which collects interest without being taxed until you can start taking it back out at age 59 1/2 (you're required to receive minimum distributions at 70 ½).
"Whatever people can do to prepare for retirement on their own is important because we just don't know what social security will be like [IN THE FUTURE]," Lebenthal explained.
According to calculations she obtained by using an online IRA calculator (which might want to try yourself), if you invest $1,000 to start, with a 6.5% rate of return, it will grow to $5,000 in 25 years. If you put $50 a month on top of that $1,000, it will grow to $41,000 over 25 years, so you would earn $2,500 off interest.
Nicole Lapin, former CNN/CNBC anchor and editor-in-chief of Recessionista.com, also suggested getting in on the market.
She advises starting a simple portfolio, focusing on brands that you know and love, such as Coach or Tiffany & Co.
"This is a good time to look at the market, which is at an all-time high," she said.
Tackle some expenses
Use some of your tax return money to tackle those mounting monthly payments, Lebenthal suggested.
Credit card debt is particularly important to pay off as soon as possible as it has some of the highest interest rates, sometimes up to 20%, she said, and therefore will accumulate faster than any other debts.
“Let's say you get back $1,000 but you have $1,000 in credit card debt that you don't ever pay off and you're charged 20% interest. Next month your bill is $1,020, [AND THE]next month your interest is 20% on the $1,020," Lebenthal explained.
But investing in the market and paying off debts are not the only way to prepare for your future, Lapin said.
She suggested using tax return money to accomplish maintenance projects around your home, such as installing a high-efficiency dishwasher, a programmable thermostat, or a storm door.
"Invest in maintenance projects around your house that will be long-term money savers," she said, "stuff that will save you money down the road on your next tax refund as well as save you on bills throughout the year."
Put some away
Lapin advised stashing some money away in a savings account "for a rainy day."
Two or three months of your gross monthly income is a good amount to save if you're a young adult, she said. The more expenses you have as you grow older, the more money you should save for an emergency.
"You always want enough money to cover your expenses if, God forbid, you lose your job, you get demoted, you have to take care of a sick parent," she explained.
Have some fun
In addition to preparing for your future, saving some money, and navigating the stock market, have some fun with your tax returns, Lapin said. After all, you did earn it.
"Allow yourself 10% of whatever you're getting back to have fun with," she advised.
But do it immediately when you get your return, "because if you don't set it aside [NOW], you're going to binge later," she warned.
Donate to charity
After you take care of yourself, Lebenthal said donating excess money to charity is another great way to spend your return.
It can maximize it if you donate to a non-profit that qualifies for a tax deduction in the next tax season.
But "it's not only the tax deduction that you get from making the donation, but it's also the feel-good part that you get," she said.
However, the money does help.
“You get a tax deduction for your next year's tax return, which is put against or subtracted from your overall taxable income, which is used to determine how much taxes you're going to pay overall," Lebenthal explained. "So it essentially lowers your overall income."