Smart ways to use your tax refund and get the most benefit
It is tax season again! Some of us scramble to pay the government what we owe. Others are happy to know that they will be receiving a refund. If a refund is on its way to your bank account, consider having a plan in place for how to utilize it. Take some time to decide what your top financial priorities are. Think about how your tax refund may help with them.
Think of the refund as your money. You worked hard for that money. The government held it from you for over the past year! Treating yourself or splurging a little is a perfectly natural response. Just be mindful of how allocating the money will help you most. You can always use part of your refund for something responsible and the rest for fun. Here are some truly beneficial uses for your refund:
Immediate needs and necessities
Do you or your family members have true needs that have been neglected due to lack of funds? Your tax refund can be helpful to get you back on track! Medical or dental appointments that have been delayed should now be top priorities. Nothing can replace health. There is no better place to spend your refund than on necessary health-related expenses. Neglecting health issues can cause a lot of stress. So, you will feel great relief knowing that you are taking charge.
Household necessities and matters of safety are two other practical uses for your refund. If you find yourself past due on rent, mortgage, or utility payments, then your refund is best spent by catching up immediately. Perhaps your car needs new tires or brakes. The safety of you and your passengers should be assured with your refund. Maybe your hot water heater is on the brink of failure? Or did your roof recently start leaking? Home repair issues could also be considered immediate needs, depending on their severity.
High interest debt and emotional debt
Personal loans from lending institutions usually have little or no collateral. That is why they sometimes come with high interest rates. If you have a loan of this type, you may want to consider paying it off in full with your tax refund. Personal loans from friends or family usually do not include high interest. However, they can be good examples of high emotional debts. Missing a payment on a loan from friends or family can be stressful, embarrassing, and humiliating. These loans can also cause problems for your interpersonal relationships, even if paid in a timely manner. If such loans are left unpaid for any length of time, you may feel guilt and pressure. This may cause you to avoid loved ones you would otherwise want to see. Consider paying off any personal loans that carry high emotional debt. This will contribute to your personal happiness. It will also help you form healthier relationships with those closest to you!
Debts that cause you emotional stress, such as a title loan on your car, can feel heavy. If you cannot pay the debt for any reason, you risk losing your transportation. That could complicate other areas of your life and cause difficulties. This type of loan usually has a high interest rate. Therefore, it would be another good debt to pay in full with your tax refund. Think of how great you would feel without any more payments for that loan! Think of how you will no longer have the chance of losing your car!
If you have a 0% interest rate on a credit card balance, the cost to you is minimal as long as you always make your monthly payments on time. However, revolving balances on high interest credit cards can be quite costly. They can also delay your financial goals. Using your refund to pay high interest credit card balances in full does two things. (1) You give yourself personal revolving debt relief. (2) You put yourself in a better overall financial position. If your refund will not cover all of your credit card debt, try to pay at least half. As an added bonus, this method is likely to help raise your credit score while you pay down the remainder!
Emergency fund and savings account
If you are fortunate enough to find yourself without any major debt, use your refund as an emergency fund. Simply deposit the bulk of your refund into an interest-bearing savings account. Try not to add the refund to your primary checking account. Doing so would make it easier to spend the funds on regular purchases. The additional cushion of savings will allow you to feel secure with your personal finances. To learn more, check out our tips and tricks on building an emergency fund.
Once your debts are paid, and you have an emergency fund in place, consider the next step. You could contribute to a retirement fund or raise your current contribution. Does your employer offer a 401(k) plan and match part of your contributions? If so, it would be extremely advantageous for you to participate. If you do not have access to a 401(k) plan, look into starting a Roth IRA. Planning for the future is a great way to utilize your tax refund! If you are already contributing the maximum amounts possible to your retirement accounts, you have another option. You may want to look into investing your refund. Check out US News for investment tips.