5 Wise Things To Do With Your Tax Refund
by Mason Kirchubel, Service Representative
Tax season is right around the corner and let’s face it, it’s not every day that the government gives you money. When that happens, it can be very tempting to go out and buy that 75” Ultra HD 4K television. While the appeal to spend that money is obvious, be sure to consider that there may be better ways to spend that extra cash. Here are just a few to get you thinking about what you want to do with this year’s tax return.
Start (or Increase) Your Emergency Fund
It’s a good idea to have some sort of savings account that you know should NOT be touched unless it’s an emergency. When planning your budget, a good rule to follow is to have six months to a year’s worth of bills saved up in a separate savings account for any unforeseen situations that might come about. If you have an emergency fund, it’s always a good idea to bolster that account whenever possible, so that when you are forced to draw from it, it won’t hit you as hard. One way to add to that account at the beginning of the year is by using a portion of your tax return. By using those extra funds, you can focus your other influx of funds for things like bills, groceries, and other necessities.
Related: Why You Need an Emergency Fund + How to Start One
Pay Off High-Interest Debt
While there are obvious differences between low-interest debt and high-interest debt – it’s in the name – the differences in how they affect you can be subtler. High interest debt is normally considered anything with a rate over 14% - things such as credit cards (major and department store), lines of credit, and payday loans - typically fall into the category of high interest debt. These types of debt are typically quicker to pay off, and may have lower monthly payments because they tend to be what is considered revolving debt - meaning that once you have paid off the credit card balance, you can then use the credit again. What does this have to do with tax returns you might ask? Well, consider a $1,500 credit card: a tax return could go a lot further to getting rid of that debt than it would go on an $8,000 car loan that has a five-year loan life. Once you pay off the credit card, you can use the funds that you have budgeted to pay on that each month, and instead have it go toward your lower-interest debt or another high interest debt that you might carry.
Spend It On Something You Need
We all need things that we can’t afford to pay for straight out-of-pocket. Many times, we are forced to either re-budget for a month or just let the expenses slide and deal with the consequences. These could include anything from car and home repairs, to medical expenses. These unexpected expenses can be very hard to deal with if you don’t have spare funds. As we all know, the cold weather can bring about a variety of car troubles, sickness, and more, and what perfect time to have a large influx of money to pay for it. A tax refund can be the perfect way to make it through the times when you're forced to make a large purchase or pay for something totally unexpected.
Frontload Your Childrens' Education
Preparing for your kids’ future is a daunting task that can be difficult for some families. Setting your children up for college takes on a variety of forms ranging from 529 Savings Plans to mutual fund investments or even just a simple savings account. Many of these contributions are tax deductible and can help get a little more out of your tax refund while helping your kids succeed. When it comes time to receive your tax refund, it might be a good idea to use some of that to add to whatever accounts you may already have set up for your children. You can also use that money to set up accounts that you have been thinking about starting, but for which you haven’t had the available funds to do so. Talk to your local 3Rivers branch about the options we offer for education savings!
Related: How to Fund College
Spend It On yourself
I know what you’re thinking at this point. This guy is taking all the fun out of my tax return and now I can’t buy that big screen that was on sale! While it’s important to make sure that you have responsibly spent the money on what you need to spend it on, don’t forget about yourself. You’ve begrudgingly put a majority of your return towards things you probably hadn’t thought of, or expected, to use it for. Now comes the payoff! Treat yourself to something you want. This is important, not in regards to your financial health – if you’ve taken some of the advice listed above you should be ahead of things for a bit – rather this is important for your own sanity. You know the old adage, "All work and no play makes Johnny a dull boy," which applies here. Go out for a nice dinner, treat yourself to a weekend vacation (see my previous post on how to do that) or buy that reasonably priced TV. There are plenty of tax season sales going on at the department stores because they know that people are getting refunds and looking for ways to spend it.
We all know the end of the year can be a crazy time for finances, and that makes it difficult to recover from. Luckily, for many of us, the year starts off with getting some of that money back. It is important to take this time to restart your finances and reevaluate your monetary goals. The tax refund is one of the easiest ways to do that. It allows you to get a head start on the year and can make a world of difference, depending on the decisions you make with it. Hopefully the above advice gives you some sort of direction and insight as to what you do with it. If you have further questions, feel free to stop by your local branch and ask a 3Rivers team member!
You might also like: Tax Return Refresher + Resources | 10 Tax Scams to Avoid | 5 Ways You Should Be Using Your Work Bonus | 5 Steps to Paying Off Holiday Debt