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7 Ways to Turn Your Tax Refund Into Financial Relief

Life & Finances

7 Ways to Turn Your Tax Refund Into Financial Relief
This credit card calculator will help you see for yourself how much putting your tax refund toward your debt can save you time, money, and a huge headache for years to come.

Americans are more cash strapped than they’ve been in a long time due to the financial fallout of COVID-19, but there’s at least one reason to breathe a sigh of relief: tax refunds. Tax day was extended this year to give us more time to get our finances in order amid all the pandemic chaos, and if you’re poised to receive a refund soon (or already have it sitting in your Sound account), here are a few smart ways to put it to optimum use.

1. Establish an emergency fund

If there’s one thing this punch-in-the-wallet pandemic showed us, it’s that we’re not as prepared as we thought we were for financial emergencies. In fact, according to a study conducted by the Federal Reserve, 25% of Americas are woefully unprepared, with some individuals and families claiming nothing at all in savings. Ideally, you should have three to six months of living expenses in a separate account. Using this year’s tax refund, or a portion of it, is a great way to get started toward this goal.

Sound offers a few high-interest options to set you up for success, including traditional savings accounts; money market accounts with a high-yield dividend rate; and several certificate of deposit options, including basic, bump, flex and jumbo certificates, that lock in a high rate with a guaranteed return. Consider which approach to financial independence might work best for your situation then contact one of our team members to start saving today.

2. Prioritize paying down debt

Credit card interest is often high and adds up quickly on a lingering balance, but outside of when we apply for the card we sometimes forget about how much that translates to in extra expense. So let’s break it down in real numbers.

If you have $3,000 in credit card debt with an 18% interest rate, a standard minimum payment of 3% would be $90 per month. Paying just that, which does decrease over time, will amount to $2,698 in interest – and take over 14 years to pay off. That means the item(s) you bought will cost you almost double its purchase price. Plus, you will have squandered the opportunity to invest that money and earn a return on it.

For the same scenario, a consistent payment of $180 per month, however, would cost a total of only $478.30 in interest. You’d be debt-free in just 20 months, having saved $2,200 and eliminating 12 years of unnecessary payments.

This credit card calculator will help you see for yourself how much putting your tax refund toward your debt can save you time, money, and a huge headache for years to come.

3. Create an estate plan

The number of adult Americans that have estate-planning documents like wills and trusts has decreased by nearly 25% since 2017 and more than 60% of U.S. adults do not have an estate plan in place. However, regardless of age or wealth, everyone over the age of 18 should have an estate plan to protect themselves, their assets and their loved ones. Most people don’t realize that if you own a home or have over $150,000 in assets, a trust-based estate plan is best because it allows loved ones to bypass the time-consuming and costly probate process.

We recommend working with a trusted legal professional to explore next steps.

4. Open a Roth IRA

If you haven’t maxed out retirement contributions to your employer-sponsored plan, like a 401(k), using your tax refund to boost your retirement savings is a smart move. Otherwise, consider opening a Roth IRA. Sound Roth IRAs offer tax-free withdrawals in retirement, no required minimum distributions at 70 and a half years, and you can expect to be in the same or higher tax bracket in retirement, giving you greater peace of mind in your golden years. You’ll also benefit from tax-free growth on earnings, no annual maintenance fees, and our Roth IRAs are available as savings and certificate accounts.

5. Invest in yourself

If you have ample time on your hands as COVID-19 keeps you home, consider investing in yourself and continuing education.

Try improving or adding to your skills through workshops, seminars and conferences, mastermind groups, or networking events. This could also include taking a class to learn a new trade or even become a certified-fitness instructor for a side hustle. The options are limitless.

Plus, it’ll get you out of the kitchen and away from the bread machine, which – let’s be honest – would be beneficial to all of us.

6. Build equity in your home

No better time than sheltering at home to tackle those put-off home-improvement projects. Upgrades and updates can increase your home’s value if you’re trying to sell it or just provide greater contentment for you and your family in the years to come.

Kitchen and bathroom renovations tend to have the best return on investment for your home value, and they’re often some of the most expensive home improvements. Less costly, but still impactful updates might include a fresh coat of paint, installing a new faucet, adding new cabinetry pulls and handles, or adding an updated light fixture.

7. Refinance your mortgage

With record low rates, spending your tax refund to refinance your mortgage loan could result in thousands of dollars in savings on interest over the life of your loan. This move could possibly reduce your monthly. Depending on which loan option you chose, you might even knock years off your repayment time.

Not sure if it’s time to refinance or not? Consult our handy mortgage refinance calculator to crunch your numbers.