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3 smart ways to spend your tax refund

While you may want to spend your tax refund on a source of instant gratification, these money moves are smarter, says TODAY financial editor Jean Chatzky.
NBC TODAY's financial editor Jean Chatzky.
NBC TODAY's financial editor Jean Chatzky.Sandra Wong Geroux

Tax Day is just around the corner, and the average refund will be around $3,000. This presents “an opportunity to do so many things that could just put your financial life in order,” said Jean Chatzky, the financial editor of NBC’s “TODAY” show and author of “Women with Money.”

So before you splurge on a family vacation or go on a shopping spree, consider one of these smart money moves with your refund:

Build an emergency cushion

Since half of Americans don’t even have $2,000 that they could access in an emergency, Chatzky warned that too often, they’ll resort to charging a credit card, which gets more expensive over time. “If you don’t have a cash cushion in the bank, put it there, use it for emergencies, replenish it over time,” Chatzky told Know Your Value. “Understand this is your get out of jail free money.”

Pay down high-interest rate credit card debt

Interest rates have been going up over the past year, and as a result, credit card debt has been increasing too. Americans paid $113 billion in credit card interest and fees in 2018, up 12 percent from the year before, according to MagnifyMoney.

“If you’ve got high-interest rate credit card debt, at like 19 percent or 24 percent, paying off that debt puts a return equal to the interest rate in your pocket,” Chatzky explained. “If you pay off a debt at 19 percent, it’s like getting a guaranteed 19 percent return on your money — you can’t beat it.”

Consider a Roth IRA contribution

Now, if you have little or no debt and also have an emergency fund in the bank, it’s smart to consider using this year’s tax refund toward a Roth IRA contribution. Roth IRAs are a good option particularly for younger investors, since they are a little more flexible than a traditional IRA or a traditional 401(k). “It goes in after tax and the money could grow tax-free forever,” Chatzky said. “You can also access it if you want to pay for education or buy a first home.”

Ultimately, this “can buy yourself more years down the road of feeling free,” Chatzky added. “It’s a nicer way of being able to get the money in a pinch.”

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