What To Do With Your Tax Refund
What To Do With Your Tax Refund
It’s tax season! Depending on how many allowances you claimed when you filled out your W-4, this could either mean you’ll be receiving a refund, or you’ll end up owing. If you receive a refund, it’s important to remember that the check you’ll be getting in the mail isn’t a bonus— it’s your own money that the government is returning, and is income that you earned during the previous tax year.
If you’re receiving a tax refund this year, you may be tempted to give in to the “treat yourself” mentality and splurge on a big purchase you wouldn’t normally make otherwise. While treating yourself every once in a while is something you should do, it’s important to consider your options this tax season to determine what will best serve you and your financial needs. To help you decide, here are ten different ideas to get you started.
- Build an emergency savings
Nearly 10% of Americans have no emergency savings. An emergency fund should be an amount equal to three to six months of your household’s monthly expenses. If you’re among the 10%, one of the wisest things to do with your tax fund is to save it for a rainy day. Although it’s not the most exciting option, you’ll have peace of mind knowing you have the funds available for the next unexpected expense.
- Pay off a credit card
Credit cards are notoriously known for charging a high interest rate, making it difficult to get ahead and pay off your outstanding balance. Using your refund to pay off a credit card (or at the very least, put a sizable dent in the debt) will ensure you don’t waste money on high interest, and you’ll improve your credit score at the same time.
- Put it in your retirement account
If you’re approaching retirement age, consider putting your refund away in either a Roth or traditional IRA. Once you’re no longer on the job, you’ll be grateful for the extra funds, whether they’re used for regular bills or that vacation you’ve always dreamed of taking.
- Set up a college fund
If you have children or grandchildren, setting up a 529 college savings plan can help them afford a higher education, especially with tuition and room and board costs on the rise. College degrees are often coupled with massive debt that stays with students for years, so every little bit helps!
- Save it for a house remodel
A remodeling project increases your property value and, depending on the improvements you make, can lower your monthly energy bills. If your refund won’t cover a full remodel, upgrading your appliances or replacing old windows are great ways to increase the functionality of your home and attract potential buyers when and if you decide to sell.
- Spend it on something you need
Do you need to order new contacts, have some dental work done, or replace the tires on your vehicle? Spending your refund on life’s everyday necessities that would otherwise come out of your regular paychecks can ease some of the stress that may come with making these larger but necessary purchases.
- Save it for a down payment on a house
Whether you’re a first-time buyer searching for the perfect home to start a family or you’re an empty-nester ready to downsize, a larger down payment upfront will ensure lower monthly mortgage payments and a shorter loan term. And, with home prices on the rise, the more you can afford to pay now, the better off you’ll be in the long run.
- Put it towards your mortgage
On the other hand, if you’re already a homeowner, paying extra on your mortgage will reduce the amount of interest you pay to your lender, helping you pay off your home quicker.
- Put it towards your car or student loan
The average used car loan is nearly $21,000, while the average student loan debt balance hovers near $25,000. Even without taking interest rates into consideration, it would take quite a few years to pay these loans off. Use your refund to reduce the balance of whichever carries the higher interest rate, and you could reduce the time spent on paying your balance off by several months.
- Take a vacation
If you worked hard in 2019 to reduce your debt, build your savings, and limit your spending, you deserve to be rewarded. Taking a vacation is a great way to relax and unwind away from the stresses of your daily routine, but be reasonable— if your refund is $500, don’t splurge on a $2,000 getaway. You’ll set yourself back, and while it’s easy to throw caution to the wind while on vacation, you’ll regret it once you return home.
While there are a variety of wise choices for spending your tax refund, there are also many that aren’t, including impulse purchases on unnecessary material items, gambling, and simply depositing the refund check into your checking account, where it can easily be spent without even realizing until it’s gone. No matter how you choose to spend or save your refund this year, be sure the decision is something your future self will thank you for.