March 17, 2017
If you’re lucky enough to get a tax refund, it’s important to not lose sight of the fact that it’s not a gift from the IRS. It is in fact your hard-earned money coming back to you, which means it’s important to use the money wisely. Here are a few ways to do that.
First option, Rev-Up your rainy day fund. It may not be as exciting as a trip to Tahiti, but having a cash cushion to ease the pain of unexpected expenses can provide priceless peace of mind. Without some extra funds on hand, you may be just one monetary surprise away from financial hardship. To avoid this, take a significant chunk of your tax refund and make a deposit to your rainy day fund.
Second option, cancel out high interest debt. Nothing can stall efforts to boost your financial position faster than being burdened by high interest debt such as credit card balances, payday loans, title loans, debt consolidation loans or high interest private student loans. Using your tax refund is a great way to eliminate high- Interest debt without putting a squeeze on your everyday budget.
Third option, pay down your mortgage or make home improvements. If you’ve covered points 1 and 2 above, consider whether you can use your tax refund to pay off some of your mortgage loan, which can save you money in the long run. Or, if you’re looking to move in the nearer term, consider whether a new roof or updating your kitchen might help boost the resale value of your home.
Fourth option, invest in a tax-sheltered account. Using your tax refund to get a head start on Roth IRA contributions or 529 college savings plan contributions is an excellent use of your tax refund, especially if you’ve already maxed out your 401 (k) contributions and are still in your working years.
Fifth option get a new business up and running. Have you ever dreamed of starting a new business but never quite have the seed money to get started? If you’re already debt-free, you can use your refund to get your new venture up and running---or, if there’s not enough startup funds, you can at least sock away what you have to help you move closer to your business goals.
Sixth option, treat yourself! Depending on the size of your refund and if you’re in the clear from debt perspective, it’s reasonable to consider splurging a little bit. For example, if there’s something you’ve had your eye on like a vacation or something new for your home. Just keep it with in your budget, of course!
There are many different ways to approach the use of your tax refund, but no matter how you choose to use it, consider having a plan rather than treating it as mad money. After all, you earned it!