Wondering what to do with your income tax refund?
Here are 5 ways to use your tax refund to improve your personal finances.
According to the IRS, the average tax refund for taxpayers to the 2018 tax season is just under $2,000. Instead of splurging on a new flat screen TV or other big ticket items, you could use that money to better your personal finances.
What should you do with the money you receive as a tax refund? Here are some ideas that will help you reach your personal finance goals.
1.) Pay down high interest debt
If you have any credit card debt the smartest thing you can do with a tax refund is use it to make a payment towards your credit card debt. Credit card debt generally carries the highest interest of all debt. The higher the interest rate on your debt, the lower the amount that your payment actually goes to the principle. So above else, pay off the higher interest credit card debt!
If you don’t have any credit card debt, but you do have an auto loan or student loan, consider making a payment towards the loan with the highest interest rate. Making an additional payments on these loans will cause you to pay less interest. Therefore, you’ll pay less overall and pay off the loan more quickly.
2.) Add it to your emergency fund
First off, if you don’t have an emergency fund, start one immediately! What is an emergency fund? Well it’s just what it sounds like. It’s an account that you don’t touch unless you absolutely must. Ideally, you have saved at least three months’ of living expenses in your emergency fund. That way, in the event of a job loss, major illness or unexpected expense, you don’t have to charge that amount on credit cards. Putting all or most of your refund towards your emergency fund can give you a great head start. Having some money socked away also gives you great peace of mind.
3.) Boost your retirement savings
You can increase your retirement savings by contributing more to your company’s 401(k), or by funding an IRA. Your employer may permit you to make a one-time additional contribution to your 401(k). Are you maxing out contributions to your workplace 401(k) plan? If so, consider using your tax refund to open up an IRA. But, make sure you at least getting your full company match before you consider opening up an IRA. Sometimes 401(k) plans can come with hefty fees, so make sure to run a comparison on your current 401(k) vs. fees applicable to an IRA. It’s possible to jump start your retirement planning and open up an IRA with $1,000 or less with many online investment providers.
4.) Save for a short term goal
If you’re feeling good about your emergency fund and debt, then consider using a tax refund for a short term goal. For example, you could set aside money to go towards the purchase price for your next car. Or, put away the money towards your next vacation. Doing so could cause you to avoid having to put that expense on a credit card. It’s wise to have some money set aside so that you don’t have to use your credit card as a crutch.
5.) Make an extra mortgage payment
Most professionals don’t advise paying your mortgage off early, unless you (1) have zero consumer debt, (2) are already maxing out your retirement accounts, and (3) have an adequate emergency fund. If you can check off all of those boxes than making an extra mortgage payment could make sense. Making just one extra mortgage payment yearly on a standard 30 year mortgage will shorten your repayment period by four year. Not too shabby.
Know how to navigate your tax refund
If you’re looking for a larger tax refund or other ways to save money on your taxes, it’s easy to find a qualified accountant in your area. And if you’re a tax beginner, here’s how to understand some key tax terms.