How much can you save when you can? A financial planner’s advice for avoiding surprises in credit card debt and emergency fund using the automated investment service

If you have credit card debt at rates in this range or anywhere close, using your tax refund to pay it down or completely off can leave you with fewer bills and lower interest charges. An example would be a credit card account with a 20.40 percent balance and minimum monthly payment of $60 which would require payments for 114 months with interest charges tacked on along the way.

Setting aside some cash can help smooth out the effect of surprise bills or fluctuating income. Cindy Scott, a certified financial planner with the automated investment service, said that they would be prepared when the unexpected happened.

Based on this year’s average refund, that would mean about $870 to debt, $1,165 to your emergency fund and current spending, and about another $870 to the future. People can adjust the amount based on their priorities. Ms. McCallister-Young said that she had to decide.

Savers may be overwhelmed by the idea of saving a lot of money while their paycheck doesn’t always cover basic necessities. The rule of thumb is for a rainy-day fund that would cover at least three months’ worth of income or expenses. Dr. Roll said it might be less daunting to start smaller — say, aiming to save six weeks’ worth of income and using your refund to build toward that goal.

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The IRS had issued 59 million tax refunds with an average refund of $2,903 by the end of March. That’s down about 11% from last year’s average tax refund of $3,263, but it’s still a big enough amount for most taxpayers to find a productive use.

With interest rates rising throughout 2022 and into 2023, credit card debt and other variable debts are now more costly than they have been the last few years. For example, recent stats from the Fed showed the average credit card interest rate on accounts it assessed worked out to 20.40% at last count, compared to 16.45% throughout 2021 and 16.28% in 2020.

You should consider making progress on high-interest auto loans, personal loans and any other debt with a high interest rate. Doing this could put you in a better place financially, and your future self will thank you.

If you can’t pay down your credit card debt by yourself, you can use your tax refunds to cover some of it. Then, you might consider opening a balance transfer credit card to refinance the rest at a promotional 0% interest rate. Cards like the Citi® Diamond Preferred® Card offer an introductory 0% APR for 21 months (17.74% to 28.49% variable APR afterward) on balance transfers.

While rising interest rates can make carrying debt costly, they can also help you beef up your savings. There are a lot of high yield savings accounts and certificates of deposit that are currently offering some good rates with no fees attached.

Maybe you’re happy with your debt levels and short-term savings but you want to get ahead for retirement. You can always increase the percentage you’re contributing to a workplace retirement account or contribute to a traditional or Roth IRA if you meet eligibility requirements.

In 2023, most people can contribute up to $6,500 across all IRA accounts. The old people can contribute an extra $1,000 in order to get a maximum donation of $7,500 this year.

Just remember that income limits cap who can contribute to a Roth IRA directly, so you may be prevented from doing so if you are married filing jointly with an income over $214,000. You may also be stuck contributing a reduced amount if you are married filing jointly with an income from $204,000 to less than $214,000. Income caps and phase out periods apply to heads of household and qualified widowers.

And while anyone with earned income can contribute to a traditional IRA, contributions are only tax-deductible for people who meet certain criteria and/or income requirements.

Source: https://www.cnn.com/cnn-underscored/money/what-to-do-with-tax-return?iid=CNNUnderscoredHPcontainer

What to do with tax refund? Investing in a 529 college savings plan for a child’s education with a Roth IRA

It is possible to invest the money in underlying funds so it can grow and compound over time, if you make a contribution to a 529 college savings plan. The state of Indiana offers a 20% tax credit on first $7,500 of contributions to a 529 plan.

If you’re worried about overfunding for college, you should know that the Secure Act 2.0 has some built-in relief here starting in 2024. Specifically, people with a 529 plan open for at least 15 years will be able to move up to $35,000 in unused 529 college savings plan funds to a Roth IRA for the beneficiary (subject to annual contribution limits).

Buying life insurance is something that’s easy to put off, but it can easily cost you less than what you would pay for a dinner out each month. With your tax refund money safely in your account, it definitely makes sense to price out coverage for yourself and a spouse “just in case.”

As an example, a company called Bestow lets you purchase inexpensive term coverage to protect your family with the potential for no medical exams required. Coverage is available in amounts from $100,000 to $1.5 million, and you can apply if you’re ages 18 to 60. Best of all, term life insurance rates from Bestow start at just $11 per month.

Source: https://www.cnn.com/cnn-underscored/money/what-to-do-with-tax-return?iid=CNNUnderscoredHPcontainer

Investing in yourself: How can you save for a few years of your college education or for vacations or the kids’ holidays?

If you want to focus on your professional life or something else entirely, investing in yourself can look different. The average tax refund could be enough for a few years of gym membership or even a home gym. You can finally be in tip top shape. You could even invest in a new wardrobe or the dental work you’ve been putting off for a few years.

If you want to make use of the money for professional reasons, you could purchase a membership in a mastermind group, enroll in a certificate program or get a formal education. The average cost of one year of community college is not likely much more than the average tax refund at $3,860 for in-district tuition for the 2022 to 2023 school year, so that’s an option too.

While your tax refund is really just your money that you overpaid to the government, there’s nothing wrong with setting some of it aside for something you really want. Maybe it’s that vacation you’ve desperately needed the last few years, or perhaps a new mattress, home decor or a new laptop for the kids.