Tax season is a stressful time for millions, but for the population which will receive tax refund, it could well be termed a joyous time. The tax refund is nothing but money coming back after being loaned to the government at negligible interest rates. However, practically, it is often an unexpected cash infusion into your bank account. In order to make your life better with that refund money, here are some smart options.
Clear your debt – if you have large credit card debts, consider using the bulk of any refund toward paying down the balance. Paying off a debt with a 15 percent interest rate is like earning 15 percent, risk-free and tax free; something virtually impossible to find these days. Debt, especially student loan debt, should be a primary target because it limits financial options, preventing people from doing what they want with their money, whether it is buying a house, buying a car or taking a vacation. Look to paying down your auto loans, home mortgage, student loans and other debt. Pay those loans with the highest interest first. Remember, it is nice to head into your retirement years without having to worry about debt payments
Build your emergency fund – it is recommended that you have enough money in savings to pay your bills in an emergency. How much is enough? That differs from person to person, but many recommend saving six months to nine months worth of expenses. Consider placing some of your tax refund into this emergency account. This money can help if there is a natural disaster, if you have unexpected damage to your home or car or if you lose your job. Consider your emergency fund a safe haven in times of need and do not touch it unless you have an actual emergency.
Invest your money – start or build up a retirement fund or other investment fund. Consider placing some of your refund into your retirement savings accounts. This way your tax refund will continue to grow and will pay you back when you retire. Whether it’s your education or that of your kids, apply your refund check to a college savings plan or 529 plan that offers tax benefits in addition to saving for college.
Improve your home – consider putting your refund to good use by adding insulation, replacing old windows and doors or other improvements that would save energy, and therefore money. Or perhaps it is time to remodel your bathroom or kitchen. You are adding value to your home at the same time you’re improving your living experience.
Apply your refund toward next year’s taxes – this is common among self-employed taxpayers, who are required to pay quarterly taxes since they do not have taxes withheld. By applying any overpayment toward upcoming tax payments, you can free up other cash.
Contribute to charity – do good for others while helping yourself earn a healthy tax deduction on your next year’s taxes by supporting a charitable cause. Make sure to get a receipt for your contribution, and be sure the organization you support is a legitimate 501(c)(3) charity.
Most importantly, leverage your refund to grow your earnings. You can choose to get more education by signing up for a workshop /conference / webinar in your chosen field. You can sign up for professional publications or other channels that help your work acumen. Purchase software or a new laptop, tools or a piece of electronic equipment that will move you ahead in your field. Improve your networking by opting for a premium LinkedIn subscription
Do not forget to spend some of the refund money on you. While splurging all of your refund on a single trip or a big-ticket item is not usually a great idea, give yourself permission to spend part of your refund on something fun. But consider limiting the amount to a set percentage of your refund check. That way you will feel better about spending the rest of it wisely and not feel like you are depriving yourself.