While it's too early to know what the average tax refund will be in 2017, if the trends of the past few years continue, Americans will be getting back about $125 billion during the upcoming tax season. This will likely translate to more than $3,000 each for the more than 80% of taxpayers who get a refund. If you're one of the millions expecting a tax refund check in 2017, here are three better ways to use it than spending it at the mall, going out to fancy meals, or taking a pricey vacation.
1. Get rid of your high-interest debt
How much credit card debt is too much? Many experts say that you should try to keep your total credit utilization below 30% of your available credit -- that is, if you have a $10,000 credit limit, you should try to keep your balance below $3,000. However, I take a much more conservative view. I say that any credit card debt you're paying interest on is too much, and should be your first priority if you're getting a tax refund in 2017.
I listed this first for a reason. Simply put, it doesn't make sense to put more money in your savings or even to invest when you're paying someone else 16% interest or more for the privilege of owing them money.
If your tax refund isn't enough to pay all your credit card debt, that's OK. Some debt reduction is better than none. For the remaining balance, you may want to consider a 0% APR balance transfer credit card, such as the Citi Simplicity card with an industry-leading 21-month 0% APR period for balance transfers. If you do this, all the money you pay for nearly two years will reduce your principal, not go toward paying interest.
2. Start an emergency fund
Once your high-interest debt situation is under control, the next thing to consider is how well prepared you are to handle an unexpected expense. According to a Bankrate.com study, nearly 60% of American adults couldn't pay for expenses such as a $500 car repair or $1,000 emergency room bill without using a credit card, borrowing the money from family or friends, or cutting back on other expenses. So, if you don't have a substantial amount of money in savings, you're not alone.
While you don't necessarily need to shoot for six months' worth of expenses like many experts suggest, you should definitely have some amount of cash in a readily accessible place, such as a savings account. Money in retirement accounts, investments, or college savings don't count -- these accounts were not put in place to fix your car or replace your air conditioner, so don't treat them like they were.
A good initial goal I like to suggest is $1,000, which, if you're like the average American, won't even consume half of your tax return. Not only would this immediately put you in better shape than more than half of American adults in terms of emergency preparedness, but it could serve as a foundation to add to periodically and build up a pretty big cushion.
3. Invest for your future and boost next year's tax refund at the same time
If and only if the first two items on this list are taken care of, that is, you don't have a significant amount of credit card debt and you have enough cash in the bank to cover an unexpected expense, the best use of your tax refund may be to invest.
I've called retirement saving the hands-down best tax break of all, and for good reason. Not only can you get tax savings, but you'll be setting yourself up for financial comfort later.
Here's a thought to keep in the back of your mind as you decide how to use your tax refund. Let's say that you get last year's average tax refund of about $3,200, and you choose to contribute it to a traditional IRA. If you're in the 25% tax bracket and qualify for the traditional IRA deduction, this translates into $800 more on next year's tax refund. What's more, assuming the stock market's historical average performance, your $3,200 could grow into nearly $50,000 in 30 years. If that doesn't make you think twice about spending your refund on a vacation, I don't know what will.
If you don't have an IRA yet, you can learn more about them, as well as where you can open one, at The Motley Fool's IRA Center.
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