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Five Ways to Spend or Save Your Tax Refund Wisely

CaptureIt’s tax refund time! Did you know that the average tax refund in 2015 was more than $2,800? With all that extra cash, it’s easy to be tempted to spend your tax refund frivolously. But just like your monthly paychecks, you need to develop a good plan for your money—and your annual tax refund is no exception. Here are a few suggestions on how to spend your tax refund wisely.

Increase your emergency fund
Living paycheck to paycheck is difficult—especially when you have a family. If you are struggling to make ends meet or do not have any funds set aside for unplanned emergencies, consider starting an emergency account with your tax refund. A good rule of thumb is to have a three-month emergency reserve of all your fixed expenses—like your mortgage, utilities and any other reoccurring payments. This will give you peace of mind, and allow you a little extra leeway in your finances should an emergency or unplanned event arise.

Pay off high-interest debt
Your tax refund is an opportunity to make headway on your current credit card debt. In fact, many financial experts rank paying down your expensive debt at the top of the list of “smart tax-refund spending ideas.”

“When it comes to receiving your tax refund, paying off or managing your debt should be the first thing you look at,” says Two Rivers Bank & Trust Senior Vice President Tom Johanns. “Paying off your current debt will allow you to better take advantage of your refund and grow financially in the future.”

Even if you are making the minimum payment on your cards each month, the interest that compounds over time could potentially add up to more than all your credit card purchases combined. Your tax refund offers you the ability to pay off your credit card debt, and start a fresh, debt-free financial plan.

Invest for a comfy retirement
Whether you choose to deposit your tax refund in your IRA, or make additional contributions to your work-based retirement plan, investing in your future is never a bad idea. Plus, when you invest all or part of your refund into your retirement portfolio, you’ll avoid additional taxes that would be taken out of your lump sum. Even if you don’t want to invest your entire return, do consider putting a portion of it away for a rainy day.

Keep it in-house
Have you been wanting to remodel your home? Or invest in some much-needed home repairs? Now’s the time. In addition to making home repairs, you could also consider making an extra mortgage principle payment. This extra payment would help you bring down the effective cost of mortgage debt, and help you pay off your home faster. With this said however, if you have significant credit card debt, we suggest paying off your cards first, as credit cards tend to have much higher interest rates.

“In general, you should also think about taking a closer look at your withholdings,” explains Johanns. “If you are receiving a huge tax refund, you may want to consider making adjustments to your Form W-4.  A small tax refund should be an unexpected surprise; adjusting your allowances to receive little or no refund insures that you are not overpaying taxes and allows you to keep more of the money that you have earned during the year.”

When deciding how to spend your tax refund, remember to analyze your finances and take into account your biggest problem areas. Be honest with yourself, and develop a good grasp on your financial life before making any final decisions. For help with your finances, or to learn more about spending your tax refund wisely, contact Two Rivers Bank & Trust today.