Getting that tax refund can be fun. It feels kind of like a gift. It can be tempting to take it and go splurge. But, now is the time to be smart with your tax refund and pay yourself first. Use your tax refund to fund your financial goals.
According to the IRS, the average tax refund this year is $2,873. Consumer surveys indicate that one out of five Americans plans to spend the money on fun stuff, like a vacation. You could do this, but there are much smarter things to do with the money.
And don’t forget, while it may feel like a gift, your tax refund is actually your money that you overpaid to the government. It should have been working for you all year. So, let’s put it to work now.
Here Are 7 ways to be Smart with Your Tax Refund
1.Credit Card Debt
This may not be as exhilarating as a trip to an exotic island but remember…when you return home those credit card bills will be waiting for you. If you are not able to pay off your balance each month, and you are carrying balances forward, be smart and use your tax refund to pay off your credit card debt. As you remember from previous posts, credit card debt kills your credit score. And if you are overwhelmed with credit card debt, you might want to consider a credit card debt consolidation loan.
2. Retirement Accounts
No matter your age, saving for retirement is an investment in your future financial happiness. Plus, the more you save now the earlier you can retire. Retirement is not linked to age! Put your income tax refund into your retirement accounts.
3. Emergency Savings
If you didn’t start your emergency savings account yet because you never have any money left over, be smart with your tax refund and launch your emergency savings account. The experts say you should have roughly three months of living expenses in your emergency fund. The more the better. And emergencies do happen. The car can break down or you lose your job, or you unexpectedly need to move. It pays to be prepared.
4. Big-ticket Purchases
Put your tax refund into a special account to help fund any big-ticket items you have planned for the near future, such as new tires for the car, orthodontics, new appliances, etc. You won’t need to use your credit card.
5. Advance Yourself
Another way to be smart with your tax refund, especially if you are already in pretty good shape with all of the above, is to invest it in special courses, training, seminars and the like. These are “purchases” that are investments in your professional growth. Perhaps there is a special certificate that you need to qualify for a promotion or a different job within your company. Use your tax refund money to position yourself for better income down the road.
6. Home Improvements
We offer online loans for home renovations, but maybe you have smaller projects that you can easily cover with your tax refund. There are many less expensive things you can do around the house that will lower your monthly payments, such as changing your windows, replacing old air conditioning units, updating appliances or fixing water leaks. If you use your refund money to make these small investments your monthly expenses will be reduced and you’ll have more money left at the end of the month to put to other priorities.
7. Make Extra Payments on Your Mortgage
If you own your own home, apply your income tax refund toward your mortgage. You will increase the amount of equity you will have in your home and lower your housing debt. This will have a positive impact on your interest rate too.
Keep Your Money in Your Pocket
Make an appointment with your HR office to review your withholding statement (W-4). Adjust the amount of withholding and keep more of your money in your pocket.