Investing 101

What Should I Do With My Tax Refund?

Spring will be here soon enough.

As will pollen, freshly cut grass and the end of tax season.

Now, I could do without the histamine-inducing gifts from Mother Nature.

But at least there’s a refund to look forward to.

Tax refunds are like free money… and that can feel like justification for a splurge.

But there are much better uses for your newfound cash.

And that’s what we’ll go over today.

Is This a Write-Off?

Hopefully, you’re one of the millions of consumers who can expect a tax refund in 2022.

The average refund in 2021 was $2,873, according to the Internal Revenue Service. And so far this year, the average refund has come out to $2,306.

Now, that number isn’t necessarily life-changing… but it’s not negligible, either.

$2,306 is more than enough to make a difference.

Especially when it comes to debt.

American families hold an average of $6,270 in credit card debt. And the worst part is that, on average, the lower their net worth, the more they owe as a percentage of their total assets.

 

Once you’re in the clutches of a credit agency, it’s extremely difficult to get out. That’s no surprise considering today’s average credit card interest rate (also called the annualized percentage rate) is 16.17%.

So with a $6,270 debt and realistic payments of $150 a month, it would take 49 months (just over four years) to pay off that debt in full…

And you’d have to cough up an extra $2,314 in interest.

But let’s say the average tax refund was applied to the average debt…

That would bring the balance owed down to $3,964.

At the same interest rate and monthly payments, you’d be able to pay off your debt more than a year earlier (in just 31 months). And you’d save more than $1,400 in interest payments.

 

Even if you pay off your credit card every month, there are still car payments, student loans and mortgages – potentially totaling hundreds of thousands of dollars.

And if you’ve ever lost your lunch over a full amortization schedule, you know that interest is the silent killer. At the end of my 30-year mortgage, I would easily be able to afford a second home with the amount that I’ve paid in interest.

So it’s easy to see why the No. 1 purpose for your tax refund should be to pay down debt.

Everything Else…

Now, let’s say you’re the perfect human and have zero debt to pay off.

You own your house and car outright. You pay your bills. You haven’t so much as borrowed $20 from a friend…

The next step would be to secure your emergency fund.

Many experts and advisors suggest keeping three to six months’ worth of expenses in a rainy day fund in order to be prepared for a big life change, such as a layoff or global pandemic. (But that couldn’t happen, right?)

This money is not to be touched for bills, everyday expenses or vacations. And it shouldn’t be invested in the market, either.

This is liquid money that you could withdraw at the drop of a hat. Just stick it in a high-yield savings account and let compounding interest work in your favor for once.

Beyond sticking it to interest rates and securing your “flee the country” go bag, the next best thing to do with your refund is, of course, to invest it.

That’s where The Oxford Club – and our world-class financial gurus – come into play.

So keep reading Profit Trends every day for all the latest market opportunities and investing research.

You’re on the right path.

Good investing,

Rebecca

P.S. If you’re on the ball and have already filed your returns, you can check the status of your refund by clicking here.

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