Tax season has started, and many have filed their taxes and are expecting a tax refund. This may seem like “free” money, but the refund is money the government owes you because you paid too many taxes. Instead of viewing this money as extra spending money, try to use this money to help you build an emergency fund, pay off debt, or save for a financial goal you have. Here are five smart ways to use your tax refund this year.
Importance of using your tax refund wisely
A tax refund is the government returning extra money you paid them from your taxes. It’s almost impossible to pay exactly what you owe in taxes, and most people will get a tax refund because they overpaid. This is already your money that you are getting back, not free money from the government.
Many people view their tax refund as extra money for new clothes, dining out, or vacationing. However, using your tax refund wisely is important as it can help improve your financial situation and achieve your goals. This year’s estimated average refund amount is a little under $2,000. You can use this money to:
* Pay off Debt
* Build an Emergency Fund
* Save for Retirement
* Save for a Financial Goal
* Invest in your home
Pay off Debt
Paying off your debt is a smart way to use your tax refund. The average American has $93,000 in debt, so while $2,000 won’t make a huge dent, it will still help. In addition, Americans typically have around $5,000 of debt on a credit card, so you can use your tax refund to pay off all or part of one credit card.
Paying off debt is important because it can help you save money in the long run. You will have fewer interest payments the sooner you pay off your debt. Paying off your debt can also help you to improve your credit score.
If you pay off some of your debt, make regular monthly payments to your other debts. Then, choose a method of paying off debt and stick with it. You can focus on the snowball method, which starts with the lowest amount owed, or the avalanche method, which focuses on paying off the highest-interest debt first. Either method works great.
Build an Emergency Fund
One of the biggest pieces of financial advice is to build an emergency fund. An emergency fund can provide a financial safety net for unexpected expenses or income loss. Using your emergency fund as a start to your emergency fund is a great way to use this money.
Your emergency fund should be three to six months’ worth of living expenses. Open a high-yield savings account for your emergency fund to get the most interest while quickly accessing your cash. You don’t want to invest your emergency fund because you want to easily access it in an emergency.
Save for Retirement
Another great option for your tax refund is to put the money into a retirement account. Saving for retirement is important for long-term financial security. Putting away $2,000 can grow into much more through compounding. The younger you start to invest and save for retirement, the less you will need to contribute to reaching your retirement goal. Consider putting your tax refund into an IRA.
Your tax refund can help you reach your contribution limits toward your retirement accounts. If you don’t have a retirement account, now is a great time to open one up and start saving for your future. Long-term financial goals like retirement take years of dedicated planning and execution.
Invest in your Home
If you want to do something more fun with your tax refund, consider investing in your home. You can make home improvements that can help increase the value of your home and make it more comfortable to live in.
Focus on home projects that will provide you with a good return on your investments. This may be a good place to start if you’ve wanted hardwood or something similar. Also, condor DIY projects to help stretch your money. This can help you build new skills and stick with your budget. Get a Home Equity Line of Credit and keep the home projects going. This way you don’t need to use all your tax refund on repairs for your house. Check out our home equity loans here.
Save towards Financial Goals
Another fun yet smart way to use your tax refund is towards a financial goal. You can have long-term, short-term, and even medium-term goals. Financial goals include retirement, saving for a house or vacation, or buying concert tickets.
If you have a goal, use your tax refund towards this. Then, keep this amount in a high-yield savings account to get the most interest toward the money you’ve contributed.
Final Thoughts
Using your tax refunds towards something that will give you peace of mind, like saving for retirement or an emergency fund or relieving yourself from debt, are great ways to use this money. Use this money to get a head start on your finances for the year instead of using the money on material items. Using your tax refund wisely can help you improve your financial situation and achieve your financial goals.
Sara DeSantis
Community Resource FCU