Use your tax refund to get ahead with these 5 best practices
Expecting a tax refund this year? Don’t let it burn a hole in your pocket. Here are 5 ways to use that money to set yourself up for financial success.
The tax deadline is a month behind us now. If you haven’t already received it, that long-awaited tax refund is probably headed your way soon! But don’t get caught treating that check as extra spending cash for a splurge at the mall. Give your refund a better purpose.
Take this time to pause and think about your current financial situation. Prioritize your needs, and leverage this bump in money to help you get ahead. Here are several ways to use your tax refund to your financial advantage.
1. Save it For a Rainy Day
No significant debts weighing you down? Use your refund to give your emergency fund a boost. Don’t have an emergency fund? Well, now’s the perfect time to start one. By stashing your cash in a high-yield savings account, you’re giving yourself a financial safety net. One major surprise expense, like a medical bill, job loss, or home repair you weren’t expecting, has the ability to send you into debt … or even bankruptcy.
Remember: an emergency fund is for emergencies. Don’t go paying for your vacation, buying gifts, or “treating yourself” (we’ve all done it) with this money. When saving, you must draw a hard line between emergencies and everything else.
2. Pay Off Debts
Student loans, payday loans, health bills, or credit card debt got you stuck in financial limbo? Use your newfound windfall to pay off or eliminate debt faster. When it comes to paying down debt, we recommend using the debt avalanche method, where you pay off debts with higher interest rates first.
Think of it this way: a $3,000 tax refund towards a credit card charging 25% interest makes more financial sense than putting those same funds in a student loan accruing 6% interest. Once those bills vanish, you’ll be able to put more money in the bank every month. Win-win.
3. Spend It on Something You Need
Key word here: need. Sometimes spending your refund is actually the best way to stay on top of your financial wellbeing. So if you’ve been holding off repairing your car, getting new glasses, or buying winter boots, let your refund help you with these essentials. Taking care of your health and home especially are vital to maintaining better financial security. If you’re an hourly worker and can’t get to work because you’re sick, or your car keeps breaking down, your paycheck is bound to take a hit. Spending your tax refund wisely is a great way to stay one step ahead.
4. Fund Your Future
If you’re in a good place financially, have little to no debt, or already have an emergency fund, it may be a good time to invest some of your refund. What better way to stash money away for retirement than by using funds that aren’t a part of your paycheck anyway? By investing your funds in a tax-advantaged account, such as a 401(k), Roth IRA, Traditional IRA, or Health Savings Account (like Starship), you’re setting yourself up with a sturdy financial foundation. Who knows, maybe this refund will help you retire a millionaire …
Consider this: let’s say you invest a $3,000 tax refund into a Health Savings Account for the next 20 years. That’s a total of $60,000, plus you earn a 7% annual return. All said and done, you’re looking at $130,000 in the bank after 20 years. That’s double the money! This long-term strategy is something you’ll thank yourself for when you’re older.
5. Fuel Your Goals
Planning a new addition to your family? Thinking about going back to college? Looking to purchase a home? This spring, take some time to establish a clear vision for both your short- and long-term goals by beginning to budget for them. Break your refund into a few pieces, each with its own purpose for the future. Using your refund to kickstart specific savings goals can prevent you from making unnecessary splurges now and down the road. Budgeting is an effective way to both achieve your goals and stay away from debt.
While it’s tempting to go on a shopping spree with your refund this year, you’d be putting your financial future at a huge disadvantage. Whether you’re expecting a big windfall or small drop in the bucket, be sure to consider all of your options for saving, paying down debt, and spending on the essentials. Then commit to a plan that’s best for your current financial situation, so when your refund arrives, you’ll know exactly how to best put it to work.