Expecting a tax refund this year? If so, you may be wondering what to do with it. Sure, there’s nothing wrong with treating yourself to something small — but in the long run, you’ll be better off using your tax refund wisely to improve your overall financial situation. There are plenty of smart ways to use your refund now that you’ll thank yourself for later on.
1. Pay Down Debt
Why not use some (or all) of your refund to pay down some existing debt? Start with debts that have the highest interest rate, as paying these down will save you the most in the long run. Even if you don’t have a large enough refund to pay off these debts completely, simply paying a little extra towards them can help reduce the amount of time it takes to pay them off—which could save you hundreds or even thousands of dollars over the life of the loan.
Some common examples of high interest debt include outstanding credit card balances, personal/unsecured loans, and student loans.
2. Save for Retirement
You might also consider using some of your tax refund to contribute more to your existing retirement account or even open a retirement account. Depending on the type of retirement account you have and the size of your refund, just check to make sure you won’t be exceeding your annual contribution limit before you deposit those funds. While you may not reap the benefits of putting extra money into your retirement fund until you’re older, it’s something you’ll surely thank yourself for down the road.
3. Create an Emergency Fund
If you were to face a financial emergency, such as the loss of a job or a sudden large expense, how would you fare? If you don’t have an emergency fund set aside, you could find yourself in a financial crisis. Setting aside your tax refund in an emergency fund can provide you with added peace of mind and financial stability in the event of an unforeseen life event.
How much money should you have saved in an emergency fund? Ideally, enough to cover at least three months’ worth of your bare-necessity living expenses. As an added bonus, you can put this money into a savings account and earn interest on it as well.
4. Look into Investing
If you have relatively little debt, are secure in your retirement fund, and already have an emergency fund set asidev— you may want to consider investing some or all of your tax refund. Not sure where to begin when it comes to investing in stocks or other options? Consulting with an experienced financial advisor can be a great starting point.
5. Consider Home Improvements
If you’re a home owner, how about putting a little money back into your real estate investment? There are plenty of home improvement projects that can not only be enjoyable for you now, but can yield a high return on investment if you plan on selling your home in the future. Some examples of home improvement projects with high returns on investment include:
- Kitchen and bathroom renovations
- Deck/patio additions
- Exterior siding replacement
Keep in mind that some home improvement expenses can even be written off on your taxes for additional savings.
The Bottom Line
As tempting as it may be to use your tax refund on a new gadget or indulgent vacation, making smart long-term financial decisions with your refund money is the responsible choice. Any of these options can be great uses for your tax refund. And remember, if you’re expecting a large refund, it may be time to adjust your withholding status for the next tax year so you’re not overpaying.
Still feeling unsure on how to use this year’s tax refund? An experienced accountant can help. Contact Scott Boyar, CPA, for help with your tax preparation and financial planning needs.