CLEVELAND, March 16, 2016 /PRNewswire/ -- While income tax deadlines are still on the horizon, it's not too early to consider ways to make the most from your income tax refund. In 2014, Americans on average received $3,211 in federal tax refunds.
At KeyBank, we know there's a temptation to consider refunds "extra" money with no immediate, necessary use.
We also know banking clients want to be confident the choices they make today help them to have the best possible financial future.
With that in mind, KeyBank offers the following suggestions for best use of a $3,000 tax refund and why we think these are good ideas:
Start or add to an emergency fund
"It is amazing how many people do not have a sufficient emergency fund cushion, whether the emergency is a $500 vehicle repair or a much more significant issue, such as losing a job," said Michael Wesley, head of KeyBank's financial wellness initiative. A 2015 Bankrate.com survey revealed more than 60 percent of those surveyed do not have enough savings to cover an unexpected $500 expense, much less to cover major expenses.
Wesley recommends setting a short-term emergency fund goal and then building on that goal.
"Total three months of take home pay and make that your first savings objective," Wesley said. "Build on those savings until your emergency fund is the equivalent of six months of take home pay."
Establish a health savings account (HSA)
By establishing and adding to a health savings account now, someone who has the good fortune to avoid major medical expenses will benefit by having savings to help pay the medical expenses that are likely to take a significant chunk of retirement income.
Estimates by HealthView Services indicate the average 65-year-old couple in good health who retired in 2015 could have more nearly $300,000 in health care costs over their lifetime. That estimate includes costs covered by Medicare Parts B and D, and a supplemental health insurance policy.
While HSA fund contributions have annual limits based on income, contributions can roll over each year, and, over time, become an additional source retirees can tap to pay for medical expenses.
Pay off credit card debt and focus on long term savings goals
"Provided an individual has an emergency fund, a next step is to review existing sources of debt and use your refund to eliminate the debt that is costing you the most in interest each month," said Christopher Manderfield, who manages Community Bank Deposit Product and Pricing Strategy at KeyBank.
Manderfield said credit card debt tends to be the most expensive source of debt: "Eliminating credit card debt – and the corresponding interest payments – frees up money for longer-term financial needs such as paying down a mortgage, funding a 529 account to cover education costs or increasing retirement contributions and savings.
For example, a $3,000 balance on a credit card with a 15 percent interest rate will take more than two years to pay off, assuming $150 minimum monthly payments. Using $3,000 – the average federal tax refund – to eliminate that card debt saves $400 in interest payments.
Bonus – paying off a credit card also frees up additional income that can be added to emergency funds, used to pay down other debt or allocated to long-term savings.
This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice.
KeyCorp was organized more than 160 years ago and is headquartered in Cleveland, Ohio. One of the nation's largest bank-based financial services companies, Key had assets of approximately $95 billion.
Key provides deposit, lending, cash management and investment services to individuals and small and mid-sized businesses in 12 states under the name KeyBank National Association. Key also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets trade name. For more information, visit https://www.key.com/. KeyBank is Member FDIC.