It is that time of year again, where a lot of Americans are getting a tax return. While not everyone gets a tax return, about 3 in 4 Americans do. Depending on your financial situation, there are a lot of different things you can use that return for. You might be thinking about using that return to go on a vacation, buy a nice gift for yourself or a family member, or invest it in yourself and family. However, one strategy many use is to prioritize debt with their tax refund. Here are some ways to do that.
First, do you have an emergency fund?
If you do not have 3 months of living expenses saved up right now, this could be the best use of your tax return. As of the first week of February 2023, the average tax return is $2,400- that could be a few months of expenses for a lot of us. Life happens, emergencies occur, and with inflation still a problem, this could be the best use of your return right now. Throw that return into a high-yield savings account, and let your security blanket earn a little more for you. This is also an excellent way to manage debt. When you have an emergency fund, you don’t have to depend on a credit card to cover the unexpected expense.
Do you have credit card debt?
Consumer credit card debt is at an all-time high. The average credit card interest rate is between 20 and 25%. If you have a credit card balance, or multiple, then strongly consider using your return towards paying that balance down. This could help take DECADES off your payoff timeline for a credit card, due to how much interest impacts your balance. If you have multiple cards, consider starting with the one that has the highest interest rate currently, and the minimums on others until that one is wiped away.
Car or mortgage?
If you have an emergency fund already, and no credit card debt, first off congratulations! That is more than most can say. If you have a car payment or mortgage payment, consider applying your return to either of those. With interest rates being higher than the past few years, it could be a good chance to get ahead on some of those payments by making a payment on your principal. Or, if you have some projects around the house, you can put that return towards a home project.