How To Make The Most Of Your Tax Refund

February 19, 2018

Ah yes, the annual tradition of gathering receipts and channeling our inner accountant! Tax Season is upon us. For millions of Americans, it also a time of great anticipation as we await the annual windfall that is our tax refund. Considering that in 2016, the average tax refund was a little over $3,000, it is easy to let our minds go to all the fun we can have with our tax refunds.

But before spending all your refund on a new TV or a car that will saddle you with high payments for the next 5-6 years, take a deep breath and think about how you can use that money to improve your current and future financial situation instead.

Option 1: Shoring up your financial foundation

If you’re still working on getting the 4 pieces of financial security in place, this can be one way to fast-track it.

  • Establish or strengthen your emergency fund – Most experts recommend having 3-6 months of expenses saved in an emergency fund to deal with unexpected expenses or even bigger events like job loss and illness/injury. Having one in place can allow you to stop using credit cards to deal with unexpected bills.
  • Pay down high interest debt – If you have credit cards or other high interest debt (north of 6% interest rate), using your refund to pay that down will save you a lot of money in interest. Once you pay off your cards, stop using them! Breaking the cycle of debt (see emergency fund above) will allow you to save for other goals and keep more of your hard-earned money.
  • Save for retirement – Using your refund to fund an IRA to help you prepare for retirement may not seem as fun as a trip to Vegas – but is a great way to get the most bang for your refund buck (and could even help you to increase your refund).

Option 2: Give your goals a boost

We all have financial goals that we are saving for, and a tax refund is a fantastic way to give those an extra boost! Here are some examples to consider:

  • Saving for college – Open or add money to the kiddos 529 plan.
  • Vacation – Set money aside for that next vacation rather than paying off the card after the fact.
  • New car fund

Option 3: A little bit of everything

It is ok to treat yourself with your tax refund, but be careful about spending all your refund on indulgences. Instead, think about splitting your refund to take care of past, present, and future you!

  • Past You – Pay off those lingering debts.
  • Present You – Treat yourself! Take 10-20% of your refund to get or do something for yourself.
  • Future You – Increase your savings for emergencies or other goals.

Making good choices with your tax refund can go a long way to improving your financial situation – now and in the future. Focusing on your priorities may not get you all the things you want right now, but it will help you get the things you want most in the long run! Happy Tax Refund Season!

 

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