When the tax refund season is here, you can expect that many taxpayers will have a windfall of cash to improve their financial situation. However, deciding exactly what to do with that money requires some planning. Below are three smart ways to use your tax refund this year.
Avoid High-Rate Credit Card Debt
You may be wondering how much interest you’re paying on your credit card right now. Consider the following:
- According to the IRS’ latest report, the average tax refund was $3,116. With a high-interest credit card, you may be paying significantly more than that.
- Experts agree that your average high-interest credit card rate is around 21.91%. This is close to an all-time high and may be impacting your wallet hard.
- Comparing your credit card debt interest rate to the rates available on a top CD account, you may be able to secure a higher rate of 4.16% or higher on a long-term CD. This can be a smart move considering economic experts believe the Federal Reserve may lower interest rates later this year.
Deposit Your Refund into a Long-Term CD
Using a long-term CD to secure a top rate can be a smart way to earn interest on your tax refund. Consider the following:
- CDs offer a fixed rate of interest for a specified term. This means that the rate is guaranteed and won’t change during your account’s term.
- Locking in a high rate above 4% is a good idea, especially with economic experts predicting that the Federal Reserve may lower interest rates later in the year.
- A deposit of $5,000 in a 2-year CD at 4.15% can generate more than $400 in returns upon maturity.
Pay Down High-Rate Credit Card Debt
Using your tax refund to pay down high-rate credit card debt is a great way to make progress in this area of your finances. Consider the following:
- Experts agree that paying down high-interest debt is a smart move, especially with the average credit card rate at 21.91%.
- Reducing your debt can also improve your credit utilization ratio and your credit score.
- By paying down your high-interest debt, you’ll likely get better terms for future borrowing, saving money in the long run.
Put it into a High-Yield Savings Account
If you don’t have an emergency fund built up, consider putting your tax refund into a high-yield savings account. Consider the following:
- High-yield savings accounts offer higher interest rates than traditional savings accounts.
- They’re a great option if you don’t have an emergency fund built up, or if you’re looking to build long-term savings.
- Experts agree that putting your money in a high-yield savings account can help build long-term savings that you don’t use for emergencies.
The Bottom Line
Rewards yourself with your smart financial decisions by putting your tax refund into one of these three smart ways. Consider your financial situation and make an informed decision that works for you. With these options, you can make progress in areas of your finances that may be struggling right now. Remember, a tax refund is more than just a windfall of cash – it’s an opportunity to improve your financial situation and make progress in the long run.
news is a contributor at CreditOfficer. We are committed to providing well-researched, accurate, and valuable content to our readers.
