Refunds can do big things when used wisely. When you think about how to spend your tax refund this year, consider your financial aspirations: Do you want a house that’s all yours? Or would like to find more peace with your day-to-day expenses?
The truth is your refund isn’t a gift. It’s actually your money. Here are five ways to spend your refund, and get one step closer to reaching your financial goals.
1. Pay off high-interest debt
Large chunks of cash are enticing. But before you book a beachside rental, consider your long-term goals. High-interest debt — whether it’s credit cards, high-interest loans or another line of credit —can absorb your extra cash. That makes it tougher to save for retirement, invest in a college fund, or put a down payment on a house. Take advantage of the opportunity to eliminate that debt and take a step toward financial freedom.
2. Pad your emergency fund
Stashing cash may not be immediately gratifying, but when you truly need it, you’ll be glad it’s there. A solid emergency fund is a safety net that covers three to six months of expenses. So, if the office shuts down, the a/c goes out, or the family car takes its last trip, you and your family can handle it in stride.
3. Start or increase a down payment on a house
Is buying a home in your family’s financial future? Dedicate your tax refund to your house fund. Whether you use it as a down payment or to cover the costs of the buying process, you’ll be closer to homeownership.
4. Increase your retirement
Investing in your retirement benefits the entire family. Whether increasing your current workplace contribution or growing wealth in an additional account, like a Roth IRA, this year’s refund can strengthen your future’s stability. If you go the IRA route, consider your options.
A pre-tax, traditional IRA requires you pay taxes later when withdrawn — it’s what most workplace plans use. If your job offers one with an employer match (where they contribute along with you), make sure to take advantage of the full match amount. A post-tax, Roth IRA, works slightly differently. Since tax is paid initially, everything in it at retirement is yours — including all of that compounded interest. Both have rules about when and how withdrawals are handled, so read up.
5. Spend your refund by growing a college fund
Since 1985, the cost of a degree has increased by more than 500%, making it a pressing financial obstacle for most families. Investing your tax refund in a 529 college savings plan secures college options for the future. The account can only be used for educational expenses. And thanks to compound interest, you’ll get to watch your money grow over time.