5 Beneficial Ways To Use Your Tax Refund
While tax time can be a dreaded time of year, your tax refund can set you up for greater financial success IF you use it to your benefit.
Seemingly unlike everyone else, I really enjoy tax season. Working at a financial firm for years, we were consistently busy just before tax day. While our clients were stressing to make the deadline, I had started preparing my taxes January 1. Minus the fact that I am a finance nerd, the excitement of filing my taxes and deciding what to do with my refund made the process enjoyable.
Assuming you’ll be receiving a refund, the big question is what to do with it to gain the greatest benefit? While the majority of people want to spend their tax refund right away, maybe this year you should put a little more thought into how you will use those newfound funds in the best way for your finances.
Here are 5 ways to use your refund that pose the greatest benefit to your financial health:
1. Pay off Debt
Whether you have credit card debt of $500 or a student loan debt of $42,000, paying off some of this debt can be beneficial to you. Paying off your debt may not seem glamorous, but it could boost your credit score and take away some financial stress. Consider using the amount on the lowest balance you have remaining in an attempt to knock out that debt once and for all, turning that debt payment on to the next lowest balance. This is called a Debt Snowball. As you see your balances decrease and your cash flow increase on a monthly basis may give you additional motivation to continue!
2. Increase Your Emergency Fund or Savings Account
It was recently reported that 66 million Americans have no emergency savings. Putting your tax refund toward your emergency savings account may not give you instant gratification but it will allow you to worry less. You never know when you are going to need an extra $1000 to repair a household appliance or something that has gone out on your car. Accidents happen and it will give you peace of mind to not have to worry about unexpected expenses. Don’t be a part of the statistic, start saving now.
3. Donate to Your Favorite Charity
How many times have you said “I will donate next month“? A tax refund is a perfect opportunity to use your funds for good. Pick a cause that you are passionate about and write them a check. Whether it’s your entire refund or a significant chunk – you will feel good knowing your money is being put to good use. Think about all of the people you could help with a little financial contribution.
4. Invest in Your Retirement
Have you thought about your retirement account lately? If not, this might be a great place to start or make a larger contribution. You could either increase your contributions to your 401k or open and contribute to an IRA. Both options will have large payoffs in the future.
For example, if you deposit $1,000 today in a retirement account with an 8% interest rate and leave it there for 35 years, this will yield $14,785.34. Imagine if you did that every year with your tax refund. From small acorns great oaks grow!
5. Achieve Financial Goals
Do you want to take a trip to South Africa to go on safari or have you been dreaming about a new sofa for your living room? No matter what you dream about, this might be the perfect opportunity to achieve one of your financial goals.
Now I am not encouraging you to buy something on a whim. It should be something that you have thought about and made plans for. If you don’t have a financial goal this might be the perfect time to start making them. Use your tax refund as a starting point.
Decide on a goal, make a plan, and then follow through. Putting your tax refund toward one of your financial goals can help prevent against the urge to use credit.
If you are going to receive a tax refund this year make sure you put it toward something that will benefit you in the future. Whether you want to use it to create a lasting memories or you are putting it toward your retirement, make sure it is something that you are excited about and will have a large payoff.
Ashley Lauren is the queen bee of money in your 20s on MasteryOfMoney.com. She blogs regularly at MoneyGravity.net and is nothing like a fine wine because she doesn't age. Read another one of Ashley's posts HERE.
Thanks, great article.