If you’re expecting (or have already received), your tax refund, be sure to consider all of your options for best-using it. From spending to saving, to investing and more, here’s what we suggest.
With this year’s deadline extending to July 15th, it might’ve felt like tax season was never going to end. But we’re happy to report that it has. The even better news? Now that all your hard work is complete, you might be one of the lucky ones who got a tax refund!
Last year around this time, we wrote a piece about how to use your tax refund to “get ahead.” And while all that good advice still holds true, a few things have changed since we last spoke on this topic—most notably, we began living amid a global pandemic.
If you’re one of the lucky ones receiving a tax refund soon, or you’ve already gotten yours, we’ll just come out and say it: what you do with that money this year might look a little (or a lot) different than previous years. Suffice to say, it’s never been more important than it is right now to think critically about how you use that extra cash. Here’s what we suggest.
1. Spend on what you need
Times have been tough—… financially and in pretty much every other way you can think of, too. So if you’re one of those people who got laid off or furloughed due to COVID-19, or if you’re back in work but still trying to get your savings pumped up to where they were, go ahead and spend where you need to spend it. Whether that’s on overdue bills, utilities, or just the ingredients to a picnic in the park with the family.
Similarly, if you’ve been earning a stable income since the beginning of the pandemic and you feel like you’re on track in saving for retirement, and you’ve got your debt under control, spending where you need to is totally reasonable.
Whether you’re expecting a big chunk of change or just a drop in the bucket, be sure to consider all of your options for paying down debt, saving, investing, and spending where you need it.
2. Save up for later
If you’ve already started saving in an emergency fund (which usually looks like three or more months’ worth of salary), the receipt of your tax refund might be the perfect time to stash even more cash.
If you don’t have an emergency fund yet, here’s your chance to create one! We particularly suggest putting your tax refund towards your health or retirement savings. You can do this through a health savings account (HSA), which is like a financial security blanket for your health and long-term wealth.
Money goes into your HSA tax-free, comes out tax-free, and grows tax-free. And while the money must be used on eligible medical expenses and services, the tax savings are next-level. It’s important to remember these tax facts because if funds are used on ineligible items or services, you’ll incur a 20% tax penalty.
In short, you shouldn’t put every last extra penny into your HSA in case you need some cash for a non-health-related emergency. But there’s no denying that an HSA is a superior safety net.
3. Pay down debt
This one’s straight from last year’s advice because, well, it just doesn’t get old (global pandemic or not). Student loans, health bills, and credit card debt have a tendency to get us stuck in financial limbo, so go ahead and use the extra cash you’re expecting to pay down your old debts.
A good rule of thumb here is to use the avalanche method. This approach looks like paying off debts one at a time, starting with higher interest rates first, then building momentum by working your way through all of your debts. To better understand how this method can work for you, check out this super-helpful debt avalanche calculator.
There are even some instances right now in which banks are taking special care to help out their customers. For example, many are allowing folks to defer mortgage payments due to the effects of COVID-19. Take advantage of these types of allowances if you need to, and redirect the cash you would have used for those payments to accelerate payments on your high-interest debts, in addition to using your tax refund for this purpose.
4. Invest for later
Even those who’ve been healthy during this time have likely experienced financial stress due to the pandemic. From market fluctuations to layoffs and furloughs, to significant drops in retirement funds, much has felt and in many ways, remains uncertain. And while we agree with many of the experts out there in saying that “it’s never a bad time to invest,” well, that statement is quite personal and should be dealt with as such.
Taking care of your short-term needs is paramount. If after taking a look at your accounts, you decide that you don’t have an adequate financial cushion at the moment, paying off debt or investing probably isn’t the best idea. Keeping yourself and your family safe and out of financial trouble is paramount.
