Make a Powerful Plan for Your Tax Refund & Stimulus Check
We are in the thick of tax season, and the House recently approved a new stimulus bill. This is great news for many people, especially considering the average tax refund is around $2,500, and the expected stimulus check for a four-person household is up to $5,600. If you missed a previous stimulus payment, filing taxes allows you to receive the funds through the Recovery Rebate Credit. Many households are going to receive large sums of money.
What can you do to make this money work for you? Here are some powerful plans for your tax refund and stimulus check.
1. Debt Reduction
It has been a very rough year. The hardships created by the pandemic have caused Americans to lean more on credit cards. Using your refund and stimulus payments to chip away at debts that the pandemic may have caused is an excellent idea. The average credit card interest rate is around 16%. By getting rid of this debt, you are kicking both the balance and interest to the curb.
2. Budget for the Year
Weave the funds into your budget to reduce the burden of day-to-day living expenses throughout the year. This could be used toward specific budget items, for example, paying some of your rent in advance. You could also use it to inject extra money for whatever you need monthly. To do this, simply divide your lump sum by 12 and transfer that amount into your checking account each month.
3. Build Your Emergency Fund
If the pandemic has taught us nothing else, it’s the importance of being prepared for the completely unexpected. An emergency fund is the safety net you need for the unknown. A good goal for an emergency fund is 6 months of household expenses. Don’t stress if you aren’t there yet; you will likely need to build up to your goal over time. Using these lump sums of money will certainly put you closer to achieving this goal.
4. Save for Retirement
Building retirement savings is key for your future. Consider contributing to a retirement account, such as a Roth IRA. Roth IRAs are post-tax retirement accounts available through investment companies, banks, and credit unions. I recommend comparing fees and investment options when seeking a new IRA account. Using the average tax refund as an example, investing a one-time $2,500 lump sum with an 8% annual rate of return would turn into almost $37,000 for someone who is 35 years away from retirement.
5. Contribute to a 529 Plan
A child with just $500 saved for their college education is three times more likely to attend college than a child with no college savings. A 529 Plan is a type of investment account similar to an IRA, but the money is earmarked to help cover future education expenses. Each state has a plan through the State Treasurer’s Office or offers a different state’s plan. Although you can use any state’s plan, there may be state income tax benefits for using the plan belonging to your state of residence. Investing just $265 one-time for a 5-year-old child with a 5% annual rate of return would provide $500 for their college expenses when they reach age 18.
A powerful plan starts with reviewing your household’s current financial situation and anticipated changes. By looking at your situation and comparing the options, you can determine what powerful plan options will work best for you and your family. The right plan may be only one of these options, but it also may combine everything I’ve discussed. Having your powerful plan in place before receiving the lump sums will ensure the money doesn’t get spent on things you have not prioritized as important.
Haven’t started filing your taxes yet? Don’t wait! The United Way has a free tax tool for those with W-2s called MyFreeTaxes. You can also locate a Volunteer Income Tax Assistance (VITA) program in your area through the IRS.