Last year, the IRS reported giving out more than $305 billion in tax refunds, with the average refund clocking in at almost $2,500.1 With all the spending possibilities out there, how do people typically spend their tax refund?
It might surprise you to learn that most Americans said they planned to put their tax refunds into savings last year.2 That’s a much more responsible option than wasting it on some spending splurge. But while we’re all for building up a cash cushion, saving your refund for a rainy day may not be the best way to get ahead financially this year—especially if you’re still in debt.
Other folks from the survey (34%) planned to use at least part of their tax refund to pay off debt.3 Based on the average American household debt totals, we ran some numbers to find out what would happen if you used your entire refund to pay down your debt. We knew the results would be positive, but you may be surprised by how much you could actually save with this one simple step.
Crush Debt Faster With Your Tax Refund
The average student loan balance is more than $35,000.4 Let’s say your balance is $35,000 at a 6% interest rate. With a monthly payment of $400, you’ll pay on that student loan for around 10 years and shell out more than $46,000 total in principal and interest.
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Let’s say you put your $2,500 tax refund toward your student loan balance. Using a student loan payoff calculator, you can see that doing this will help you pay off your loan almost a whole year sooner and save more than $1,800 in interest.
Now, let’s take things a step further. A $2,500 tax refund doesn’t mean you hit the jackpot. It’s simply the government returning your money—money you could have been using all year long to pay extra on your debt. Don’t wait until next year to get your money back. Work with a tax advisor to adjust your withholding today so you can bring home an extra $200 a month ($2,500/12), starting with your next paycheck!
Use that $200 to pay extra each month on the remaining balance of your student loan debt. With this method, you’ll pay it off in about five years instead of 10. And you’ll save over $5,500 in interest!
That’s how you put a tax refund to work! Here’s how that same scenario can work on your other debts:
Households with debt currently owe an average of more than $14,500 in credit card debt.5,6,7 Yikes! At the minimum payment of 4% of the balance, and with a 15% interest rate, it’ll take you 13 years to pay that off. But if you apply $2,500 to the balance when you get your refund check and add that $200 to your monthly payment after adjusting your withholding, you’ll knock that sucker out in no time and save yourself thousands of dollars in interest!
The latest research shows that the average used car loan is almost $21,000 at a nearly 10% interest rate.8 Most people finance their cars for five years, although the average term is creeping toward six. With your one-time $2,500 payment followed by your increased monthly payments of $200, you’ll pay off your wheels two years sooner and save nearly $3,000 in interest!
As home prices continue to rise around the country, the average mortgage balance has swelled to over $202,000.9 Using our mortgage payoff calculator, you can see that with your tax refund and increased monthly payment of $200 (from your newly adjusted withholding), you’ll pay off your home nearly three years early and save more than $12,500 in interest!
Roll Your Tax Refund Into Retirement
As long as you have at least $1,000 in a starter emergency fund, there’s no reason not to use your tax refund to pay down your debt. For those of you who are out of debt and have three to six months of expenses saved for emergencies, use our investment calculator to see how your tax refund can do great things for your retirement account.
With an initial investment of your $2,500 tax refund followed by monthly contributions of the $200 you gained after adjusting your withholding, you could add nearly $789,000 to your nest egg over 30 years! That’s a total of almost $75,000 of your money and more than $714,000 of growth. This is one simple way to catch up if you’re feeling behind on your retirement savings goals.
Maximize Your Refund With an Expert Tax Pro
None of this is possible, however, unless you make sure you get back all the money Uncle Sam owes you. An experienced tax professional will spot deductions and credits you may not know about, and they’ll help you get your largest refund possible. Then, your tax pro will help you adjust your tax withholding so you aren’t giving the government a tax-free loan each year. It’s time you put your money to work paying off debt or investing for a secure retirement.
We can put you in touch with a tax expert we recommend in your area so you can get going on your debt snowball or retirement fund as soon as possible.