from daveramsey.com on 01 Apr 2015
Last year, the IRS wrote $305 billion in tax refund checks, with the average refund clocking in at a little more than $2,900. Lots of early filers have already received this year’s tax refund and many more taxpayers will soon be busy considering all the spending possibilities.
It might surprise you to learn that more than 60% of Americans said they planned to save or invest their tax refunds last year.
That’s a much more responsible option than frittering it away on vacations or some other spending splurge. But while we’re all for building up a cash cushion, socking your refund away for a rainy day may not be the best way to get ahead financially this year—especially if you’re still in debt.
We ran some numbers to find out how much of an impact the average tax refund could have if you use it to pay down average debt amounts. We knew the results would be positive, but you may be surprised by how much you could actually save with this one simple step.
Your Tax Refund vs. Your Debt
First up: student loan debt. The average student loan balance is $28,400, and we’re estimating interest at about 6.2%. With the average monthly payment of $242, you’ll pay on that student loan for 15 years and shell out a total of nearly $47,000 in principal and interest.
If you put your entire $2,900 tax refund on your student loan balance, you’ll pay off your loan two years and three months sooner and save almost $3,900 in interest.
Now, let’s take things a step further. A $2,900 tax refund isn’t really a windfall. It’s simply the government giving you back 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. Adjust your withholding today so you can bring home an extra $240 a month ($2,900/12) starting with your next paycheck!
Use that $240 to pay extra each month on the remaining balance of your student loan debt. You’ll pay it off in about 5 years and 6 months instead of 15 years. And you’ll save $9,000 in interest!
That’s how you put a tax refund to work! Here’s how that same scenario can work on your other debts:
Credit cards: Current average credit
card debt per household is $15,611 at 17.94% interest (holy cow!). At the minimum payment of 4% of the balance, it will take you more than 14 years to pay it off. But, if you pay $2,900 on the balance when you get your refund check, then increase your monthly payment by $240, you’ll knock that sucker out in 18 months! Plus, you’ll save yourself $6,700 in interest!
Car loans: The average used car loan is nearly $18,000 at 8.8% interest. Most people finance their cars for five years, although the average term is creeping toward six. With your one-time $2,900 payment followed by your increased monthly payments, you’ll pay your wheels off in about half the time and save more than $3,000 in interest.
Home loan: The average mortgage balance is $155,200 with a 4% interest rate and a 30-year term. With your tax refund and increased monthly payment, you’ll pay off your home more than 11 years early and save $45,000 in interest!
Roll That Refund Into Retirement
As long as you have at least $1,000 in a beginner emergency fund, there’s no reason not to use your tax refund to get rid of your debt. For folks who are out of debt and have their full emergency fund, their tax refund can do great things for their retirement account.
With an initial investment of $2,900 followed by monthly contributions of $240, you could add $570,000 to your nest egg over 30 years! That’s a total of $86,400 of your money and more than $480,000 growth. That’s one way to catch up if you’re feeling behind on your retirement savings goals!
Maximize Your Refund With Expert Advice
The first step to this plan, however, is making 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, and you can put your money to work paying off debt or investing for a secure retirement.
Let us help you find a tax expert Dave recommends in your area so you can get going on your debt snowball or retirement fund as soon as possible. Get in touch with your tax professional today!