So you got your tax refund and you're not sure what to do with it. Instead of splurging -- which, admittedly, is incredibly tempting -- there are some smart moves you can make with your money.
Below are 10 tips in which you can use your tax refund to improve your life.
10 Smart Ways To Use Your Tax Refund
1. Pay Off Debt
Debt causes not just financial pressure, but personal stress over the worry of carrying debt and paying hundreds or thousands in interest during the life of the loan.
High-interest debt -- specifically credit card debt -- can not only cost you money but also damage your credit score due to high credit utilization.
Using your tax return to pay off debt can reduce your credit utilization (ideally, you want to keep it under 30%).
Lowering your balance can also help you manage your debts. Whether you want to pay off one card or multiple is up to you: you can use the snowball method (in which you pay off one or two of your small balances and work your way up to the largest debt) or the debt avalanche (in which you pay down larger, high-interest balances first to pay less in interest).
2. Build Your Emergency Fund
Most Americans don't have several hundred dollars stashed away in the case of an emergency, but having an emergency fund is essential.
Your tax refund is a perfect opportunity to start building your nest egg. Ideally, you want to have six months' worth of rent and other living expenses saved up in the case of an emergency. Resorting to your credit card could result in high-interest debt that could take months or years to pay off.
Try to find a high-yield savings account and keep it in a separate -- but easy to access -- account so you're not tempted to spend it.
3. Contribute To Your Retirement
If you haven't already, now is the time to open -- and contribute -- to your retirement.
Whether you have a 401(k) or IRA, you can use your tax refund to max out your contributions.
You may also want to consult a financial professional to build a portfolio for your financial goals or invest in a stock that has potential for growth.
4. Refinance Your Mortgage
If you're a homeowner and you're in the position to do so, consider refinancing your mortgage. Refinancing can save you thousands of dollars on your mortgage by reducing the principal balance while lowering the mount you pay on interest.
You will have to shop around to find the best loan since interest rates can vary wildly from lender to lender. (We recommend Credible for your loan refinance needs.) Always factor in any fees to make sure you are really saving before agreeing to your new loan and terms.
5. Invest In Yourself
Make an investment in yourself by finding ways to improve your current skills. Attending workshops and taking courses can help you hone your strengths and help you land new job prospects and contacts.
6. Home Improvement
Upgrading your home is expensive but has the added benefit of increasing its value (if you're selling) and makes your space comfortable and cozy (if you're staying).
Using your tax refund for a small DIY fix (a fresh coat of paint, a new smart thermostat, or landscaping) or replacing an old appliance (like a washer/dryler) with a new one that is energy efficient and will result in lower utility bills.
7. Save Up For Future Expenses
If you know you have a big expense coming up, now is the time to save and avoid the headache of having to use a high-interest credit card or loan in the future.
If you don't anticipate a large bill, then you can use your refund to save up for a big expense for something you may want in the future, like a down payment for a home or flood/home/liability insurance.
8. Build Your Sinking Funds
A sinking fund is just a term for funds that you add over time for a large expense. You can use your tax refund to add to each of your savings goals, whether it's for a move, new vehicle, or family expense.
9. Donate To Charity
Don't have any pressing financial matters? This is a great opportunity for you to donate money to a charity or cause that matters to you. Make sure you save any receipts from donating so you can have documentation for tax deductions the following year.
10. Save For Your Childrens’ College Education
With the rising cost of higher education, saving up for those expenses down the road is essential -- even if your child qualifies for financial aid and scholarships.
You can begin saving for this by contributing to a 529 college savings plan and gradually build your savings so you won't have to worry about a sudden large bill in the future.
Should I use my tax refund to pay off debt?
Absolutely -- especially if you have high-interest debt such as credit card debt. Paying down this debt can save you hundreds in future interest charges.
What are some ways I could use my tax refund?
There are plenty of ways you can use your refund to help you financially:
- Build an emergency fund
- Contribute to your retirement
- Add funds to your health savings account
- Invest in the stock market
- Home improvement
What should I not do with my tax refund?
Your tax refund is the perfect opportunity to invest in your future. Avoid making any large credit card purchases or hasty investments. Take time to figure out how you can use the money to best help your finances.
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