10 smart ways to use your tax refund
1. Pay down existing debt
Paying down existing debts like credit card bills, car loans and student loans is one of the smartest money management moves for your tax refund, especially if you have high interest rates. Paying down existing debt will allow you to build your credit and have more money throughout the year. Just make sure your loans don’t impose a penalty for early payments.
2. Build you emergency fund
Take a portion of your tax refund and stash it away in an emergency fund. You will be glad you did when the car breaks down or an unforeseen medical expense occurs. Saving a portion of your tax refund is a great way to start an emergency fund and if you continue to put a portion of your paycheck into your emergency fund each pay period you can ensure that you are prepared for anything. Ideally, you want to have an equivalent of 3 months of your income saved in an emergency fund.
3. Fund your retirement account
If you have a 401K through work, you can use your tax refund to make additional contributions. If you’re only putting in 3% of your paycheck, but your company matches up to 6%, you can double the pre-tax income you’re investing to maximize retirement funds. Your paychecks will be slightly lower but you can use your refund to make up the difference while investing in your retirement and lowering your taxable income. If you don’t have a 401K, or you are content with your current contribution but want to invest more into your retirement, you can make additional contributions to your retirement by opening an individual retirement account (IRA). You can contribute up to $5,500 based on your yearly income ($6,500 if your 50 or older). This investment is something you will thank yourself for when you’re older.
4. Start saving for something BIG
Open a savings account dedicated to one BIG thing you want to do or have in the future is a great money management move. If you want to take a dream vacation, buy a car or save up for a down payment on a house then opening a savings account and contributing some of your tax refund to building this account is a great idea! Keeping the money separate from your regular bank accounts makes money management for major purchases easier and means you’re less likely to dip into it for splurges.
5. Make improvements
Using your tax refund to make necessary updates or repairs to your home or car is a smart way to use your refund and increase their value. Updating outdated items such as energy inefficient appliances in your home, or worn out tires on your car will not only make the quality of life better for you and your family but it could also make your utility bills decrease and could increase their resale value.
6. Fill in the gaps in your insurance
Invest in additional insurance that isn’t covered in your standard home or auto insurance plans. You can use some of your tax refund to purchase an umbrella liability policy with coverage beyond the limits of your car or homeowner’s insurance. Sometimes good money management means addressing the painful “what if” questions.
7. Make a charitable contribution
If you have your financial bases covered, receiving your tax refund gives you a perfect opportunity to donate money to a cause that’s close to your heart. You’ll feel good — and you’ll be rewarded for your good deed when you file your tax return next year. Be sure to save your receipts from donating, so you’ll have the proper documentation so you can itemize your deductions next year.
8. Start building your college savings
Use the extra money you get back from your tax refund to start investing in your or your children’s college savings. Consider opening a 529 account You’ll be able to use the money you contribute tax-free for college bills and you could get a state income-tax reduction for your contribution.
9. Teach your kids to save
Teach your children the power of saving by using extra money from your tax returns to open them a savings account. They can learn the importance of saving by contributing a portion of the money they earn from doing chores or babysitting to their savings account each month. This will build a good base for future money saving habits.
10. Invest in yourself
Maybe you’ve wanted to take a college course or learn a new skill. Consider using some of your tax refund to make an investment in yourself. Learning a new skill that’s relevant to your job could aid your career, and learning a new home-based skill, like cooking, can lower bills and improve your quality of life. Investing in yourself is a great way to use your tax refund and this investment could lead to bigger and better things.