It’s that time of year; families across the country are receiving their tax refunds, and they are trying to figure out what to do with the influx of cash. While it may be tempting to splurge on a big ticket item, that isn’t always the best financial move. There are plenty of other options that can benefit your financial situation. Here are 10 ways you should be using your income tax return.
1. Build Up an Emergency Fund
Most experts agree that having three to six months of living expenses stashed away in a savings account is smart. It gives you a level of protection against the unexpected, such as a job loss or medical emergency.
However, even if you don’t have that much available, something is always better than nothing. Consider using your tax return to get started, or at least save $1,000, which is enough to cover most insurance deductibles or handle a small emergency.
2. Pay Down High-Interest Debt
If you have high-interest debt, like a credit card, paying it down with your tax refund is financially wise. Not only will this help you lower your monthly bills, but it also saves you a ton in interest.
Considering the average credit card APR falls between 16.86 and 23.73 percent, depending on the kind of card, paying off balances sooner rather than later is a good idea.
However, if you don’t have high-interest debt, that doesn’t mean you should use your tax return to pay down balances. If you are paying more in interest than you could earn from the money, such as by investing the cash, then you should consider sending your tax return money to a creditor.
Just make sure that you check your account in advance. Some loans charge early payment penalties. If yours does, then making extra payments or paying off the loan early could result in a pretty large fee, offsetting some of the benefits In those cases, you need to do the math and make sure that you are saving enough in interest to make paying the fee seem reasonable. Otherwise, you might want to explore other options.
3. Fund Your Retirement
Even if you invest in a 401(k) through your employer, that doesn’t mean socking your tax refund away in an individual retirement account (IRA) isn’t a great way to use the money. Almost anyone can open one form or IRA or another, even if you contribute to a retirement plan at work.
It is important to note that the tax benefits of an IRA vary depending on the type and your modified adjusted gross income (AGI). Additionally, your annual contribution limits can also vary based on your unique circumstances.
4. Open a 529 College Savings Plan
If you have a child who will likely go to college one day, or you are considering heading back to school yourself, putting your tax refund into a 529 College Savings Plan is worth exploring. These investment accounts are designed to help financially support certain educational expenses, like college tuition.
Plus, if you or your child ultimately don’t go to college, there is no penalty for withdrawing your contributions. Just keep in mind that you would need to pay taxes on any earnings you pull and may be subject to a 10 percent penalty depending on how the funds are used.
5. Start Investing
If you have your emergency fund in place, retirement squared away, and no high-interest debt, then it might be time to start investing. You can use your tax refund to open a brokerage account, allowing you to invest in stocks, mutual funds, index funds, and much more.
Investing can be a way to see your tax return grow over time. While there is some risk involved, certain approaches do limit the risk. For example, index funds are a great place to start if you are new to investing. They offer an inherent level of diversification and typically perform better than when a person tries to pick and choose stocks on their own.
6. Improve Your Home
If you are a homeowner, using a tax refund to update or repair your home might be the right choice for you. Some improvements can increase the value of your house while others simply make daily life more comfortable. However, if you have been putting off a major repair, that should be where you start.
Your home is a major asset with a financial value. By increasing its value and making it more enjoyable to live in, you almost can’t go wrong.
7. Take Care of Your Car
Vehicles require a lot of maintenance over the years, and some of it can be costly. New tires, replacing a serpentine belt, or flushing the radiator all come with a price tag.
If you have been putting off any car maintenance because you couldn’t afford it, use your tax return to handle the expense. That way, your vehicle is in the best shape possible. Plus, it could help it last longer, which saves you money in the long run.
8. Prepare for Medical and Dental Costs
If there is an expensive medical or dental treatment in your or your family’s future, consider saving your tax return to handle the cost. That way, you can pay the bill off immediately, and you don’t have to worry about finding the cash.
This is especially true if treatment will be ongoing. For example, orthodontic care can add up fast, and most people have braces for at least a handful of months, if not a couple of years. By setting your tax return aside, you know the treatment plan can go forward without any financial hardship.
9. Invest in Yourself
There are tons of ways a professional can invest in themselves. Maybe you want to take a class to add a new skill or have your eye on a particular certification that can increase your earnings potential.
If there are options that can help you develop your skills or talents, or enhance your experience, then use your tax refund to support your growth. Then, you might be able to increase your income faster, making it a worthwhile investment.
10. Treat Yourself (Responsibly)
If you have already handled everything above, then there is nothing wrong with using your tax refund on something fun. For example, you could save it for a vacation or replace a worn out television.
Just make sure that you are conscientious about your choice. If you want to purchase a new tv, look for sales and make sure you buy a quality model at a great price. That way, you don’t spend any more than you have to, ensuring your tax return goes as far as possible.
Are you getting a tax refund? Do you already know how you want to use it? If so, share your thoughts in the comments below.
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