The average American is one financial emergency away from financial disaster, according to a report released early this year. Nearly half of Americans lack the savings to cover basic expenses — rent, car expenses, food — in the case of a financial hardship. Without these savings in place, any financial emergency could lead to extreme financial hardship and growing economic insecurity.
Now is as great a time as ever to think about how you will spend your tax refund — if one is due to you — as the deadline to file is quickly approaching. Averaging around $3,000 for the average American, a tax refund is often the largest sum of money you will receive at one time each year.
It is tempting to splurge on a large item or a much needed vacation. But dedicating a significant portion of your refund to savings is a great way to establish and/or strengthen your personal economy to weather financial emergencies.
Start stretching your tax refund by:
Establishing a savings account at your local bank or credit union
You want to have a 3-6 months financial reserve. Consider contributing to a high-yield savings account and or money-market deposit account to build your financial emergency fund. Even if you start small, that is more money accessible if the situation calls for it.
Building college savings
Education is critical for upward advancement. With the skyrocketing cost of college tuition, establishing a significant college savings is more important now than ever. Consider establishing a 529 Plan to cover educational expenses for you and/or a family member. Operated by a state or educational institution, a 529 Plan is designed to help families set aside funds for future college costs. Plus, it's tax free!
Investing in retirement
Building a solid nest egg is more important than ever to live a comfortable retirement. If you have a 401(k), a 403(b) or a 457 plan, consider increasing your contribution amount for 2013. With your 2012 refund, you can absorb the extra money coming out of your paycheck.
If you do not have a 401K, consider establishing or strengthening your IRA.
Buying life insurance
If you have a spouse or children who depend on your salary, you should have ample life insurance as a safety net for your family. In the case of death, life insurance helps ensure your family’s financial future is secure. Life insurance packages vary from term insurance (for a certain amount of years), which is pretty affordable, to universal insurance.
Paying down high interest debt
While it may not necessarily constitute as saving in the short term, in the long term, paying down high-interest credit card debt and student loan debt will reduce your payments and save money on the interest you would have paid. Additionally, paying off debt frees up money to contribute to the aforementioned savings mechanisms.
Don’t let your tax refund slip through your fingers! Stretch your 2013 tax refund with some of these strategies today and build your economic security for years to come.
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