We all know that being responsible with our money is a good idea, but sometimes following through with fiscal responsibility can be difficult. It’s tough to stash away large sums of cash in the rare moments we’re able to actually obtain a large sum of cash. One of those rare moments might be coming up for some of us as we get ready for our tax refund. The average tax refund is around $3,000 and can be expected within three weeks of filing. Though it may be tempting to spend it frivolously, here are 8 smart ways you can use your tax refund:
1. Pay Off Debt
Use your refund to pay for your debt and you can save a bundle on potential interest accrued. If you have a card with 18% interest and you’re able to pay off what you owe on the card, you’ve saved yourself that 18% interest. It’s one less bill to pay and more monthly cash that can go toward your budget.
2. Build Your Emergency Fund
Life can get tricky sometimes, that’s why it’s important to have some financial cushion to fall on when needed. Consider building your emergency fund to have 3-6 months of expenses and keep it in a savings account that earns interest and is accessible so you can get to it when life emergencies strike without warning.
3. Grow Your Retirement
Make your future self grateful for the decisions you make today. In 2020 individuals under 50 years old can sock away up to $6,000 toward an IRA and if you’re 50 or over you can contribute $7,000. Did you know that if you saved $2,000 a year in an IRA from age 19-26, by the age of 65 that money would grow to over a million dollars (assuming a 10% rate of return)? Consider putting your refund toward something that will benefit you in the long-term instead of something that will be quickly forgotten.
If you have paid off all your other debt, your emergency savings is built up and you’re on track for your retirement goals, here are some other smart ideas for your tax refund. Keep in mind though, the first three ideas should take priority over the rest of these tips.
4. Put it Toward Your Mortgage
Prepaying your mortgage over time can save you a significant amount of interest over the years. However, before you commit to doing this you should be aware of the interest rate on your mortgage, your marginal tax rate (assuming you are able to deduct the interest), and other investment alternatives. In the long term, a lot of your mortgage payment goes toward interest instead of principal. Adding extra payments when you have the extra money can make a significant difference over the life span of a home loan.
5. Invest in Your Children’s Future
According to CollegeData, in the 2019-2020 school year the average cost of an out of state public college education is around $26,500. Private colleges are up to almost $37,000. CNBC predicts that average for public college will jump to nearly $54,000 by 2035. That means a four year degree could cost over $200,000. One of the smartest things you can do for your child’s future is to start a college fund for them now so they aren’t stuck with an enormous amount of debt on their graduation day.
6. Start a Savings Fund
Instead of putting expenses such as vacations, new cars, or holiday costs on a credit card that accrues interest, use your refund to start a savings account for annual expenses. That way you can pay for holidays, a new car or vacation upfront and not borrow from a credit card.
7. Improve Your Home
While a refund isn’t enough to complete large scale renovations, you can use it to make smaller updates to your home. Small updates such as new faucets, light fixtures or flooring can go a long way in modernizing your home. It’s easy to make low-cost update with a big return to your yard as well. Check out these tips on our Pinterest board.
8. Donate
If you already feel financially secure and prepared, think about giving back to a charitable cause that you’re passionate about. Giving to people or organizations in need makes us feel great and brings fulfillment to our lives. Plus, donations to nonprofits are tax deductible. If you’re looking for an organization you can stand behind and support, check out these United Way supported programs: http://springfieldunitedway.org/our-work/community-fund/funded-programs/#.WPaE39LyuM8
Your tax refund is not free money, it’s your hard earned money so make it work hard for you.