Here's what to do with your tax refund
By Brian O'Connell/MainStreet.com
Americans love their tax refunds. In 2014, we got about $305.7 billion in tax refunds, or about $2,792 per individual tax return. That's up from a year earlier, when those figures were $301.8 billion and $2,755, respectively.
Refund recipients want to do the right thing and use their money to improve their financial situation rather than their comfort. According to a Bankrate.com study, 84 percent of American taxpayers want to either "pay down debt, save or invest their windfall or use it to pay for necessities." Only 7 percent want to spend their tax refunds on frivolities such as travel or a big-screen television, Bankrate says.
Eric Tom, a financial advisor at Roslyn, New York-based MetLife Premier Client Group, has four ideas on how to follow through, and none have anything to do with spending:
Pay off your debt: Cutting down on debt, especially credit card-based debt, should be a high priority for tax refund recipients. "Use your tax returns to get rid of some pesky debt, especially high-interest credit cards," Tom says.
Use your company's 401(k) plan: If your company offers a retirement plan such as a 401(k), take advantage of the opportunity to ramp up savings, he says. "Sign up for your company's plan and receive an upfront tax deduction on your retirement savings," he says. "If the company has a match, it's the best return you're going to get on that money. If not, consider opening up an IRA to defer your tax payments until you withdraw."
Open a money market account: Bank money market accounts aren't producing high interest rates, but your money is protected and there is the added element of liquidity if you need fast access to cash. "This will allow consumers to get the biggest possible return without sacrificing easy access to funds," Tom says.
Separate your savings from your checking account: If you only have a checking account, consider opening up a savings account to earn higher interest rates on your money, Tom says. That also gives you another savings vehicle -- always a good tool for long-term savers.