Be kind to yourself.
The average tax refund coming to taxpayers this year is $2,952, and some people will be so kind to themselves they will turn it into $20,000 or even $50,000.
How? Here are three ideas that will turn $2,952 into a hefty sum:
Save for retirement
If you are among the people who have no idea where to find money to start or prop up their retirement savings, your tax refund can supersize the possibilities.
Let’s say you are 25 and decide to open your first individual retirement account. You go to a mutual fund company such as Vanguard, Fidelity or T. Rowe Price and ask to open an IRA, and put the entire $2,952 into a balanced mutual fund.
The manager of that fund will divide your money roughly 60 percent into stocks and 40 percent into bonds. So you will have a diversified investment with a single mutual fund. By the time you retire, your $2,952 should become about $50,000 if it grows an average of 7 percent a year, the average gain over the last 84 years, which, of course, isn’t guaranteed.
If you are 35, that $2,952 in the same mutual fund should treat you well but not as well as for the 25-year-old who got a 10-year head start. For a 35-year-old, the likely outcome at retirement is about $26,000.
At 45, it’s likely to grow only to $13,000. At 55, you should get to about $6,200.
Want to check out the impact of your refund? Play with the compounding calculator at tinyurl.com/2f8dyw.
Erase some debt
Let’s say you have $5,000 in credit card debt and are running up interest charges at a rate of 15 percent annually.
You know that you are having a tough time buying what you want, because you keep paying more and more interest on the charges you put on your cards months or even years ago. You would love to get rid of this lead weight once and for all.
In fact, if you could finally be free of this pressure in a year, that would be delightful. But to do that, you are going to have to make monthly payments of $451, which might be out of the question if you still intend to eat.
But what about if you use your full $2,952 refund to remove that lead weight on your financial life? Now, you are making this more manageable.
You have only $2,048 left on your credit cards, and you can wipe the entire mess away in a year if you make yourself pay $185 a month on your credit cards and don’t use them again while doing it.
Whipping those cards out again will only undo all your hard work. So use a debit card instead of your credit cards, and set up your credit card payments to automatically take $185 out of your checking account each month. To understand how long it will take you to pay off your debts, try tinyurl.com/3n4vtau.
Start a college fund
If you started saving for retirement in your 20s, putting 7 percent of your pay in a 401(k) plan at work and getting a 3 percent match from your employer, you probably are doing well with your retirement savings. But maybe you have let college go, and your child is getting older by the day.
If you plop that $2,952 refund into a 529 college savings plan offered by a state and earn 7 percent on average each year for the next 10 years, today’s 8-year old should have about $6,000 for college. Stash away $2,952 each year and you will make real progress, about $50,000.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
