Do you plan on receiving a tax refund this year? It’s easy to fall into the trap of viewing your refund like a bonus. But just like your paycheck, you should give your refund money a purpose. Your tax refund can be a great tool to meet your financial goals. Here are the best ways to use that extra money from Uncle Sam.
Pay off debt
Getting rid of some of your debt is one of the smartest ways to use your extra money. Although it might be tempting to go on a shopping spree, you’re much better off tackling any debts that are accruing interest. The cost of interest over time can make paying off your debt a never-ending cycle. Making a bulk payment toward your credit card or student loans can help save you money in the long run. It might not be the most glamorous way to use the money, but your future self will thank you!
Build your emergency fund
Most financial advisors recommend having an emergency fund with enough money to cover 3-6 months of expenses. Using your refund to grow your emergency fund can give you more peace of mind and protection against any future unknowns. Building up savings can be tough if you’re living paycheck-to-paycheck, so making a deposit from your tax refund can help build up that account more quickly. Plus, once it’s in your savings, you’re much less likely to spend it on something frivolous.
Max out your employer match
Many employers offer a matching contribution for retirement accounts such as 401(k)s. If you’re not already getting the maximum amount of employer match, you’re missing out on free money! Use your tax refund payment to create a buffer in your budget. Then, you can make adjustments to your paycheck to make the necessary contribution for matching benefits. This is a strategic way to use your money because the retirement funds will continue to grow over time.
Invest in your Roth
If you’re already maxed out on your 401(k), your tax refund can make a great start or addition to a Roth IRA. This is another smart strategy to make your money work for you and grows over time. While retirement might be far from your mind now, it’s never too early to save!
Contribute to an HSA
HSAs, or health savings accounts, are great tax-advantaged savings tools. If you have a qualifying high-deductible health plan, use your tax refund to start or build up your HSA. Unlike other types of accounts, money in your health savings account is yours to keep from year to year. Even if you’re in great health, a health savings account offers some tax advantages as well as a buffer to help you with any future healthcare costs.
Buy something you really need
Instead of splurging on bottle service the next time you go out, you can put your tax refund to work by buying something you actually need. Maybe your car needs some repairs, or your professional wardrobe is looking shabby, or you need some dental work done. Your refund can give you the extra cash flow to take on an important purchase that you couldn’t otherwise handle.
Jump-Start your goals
A lump sum tax refund might be just what you need to hit that next financial milestone! Use it to knock out a down payment for a car or home, or start an education savings fund for a child or loved one. Or, use it to make home improvements to increase the value of your home.
Invest in yourself
Your tax refund can be the perfect way to pay for a professional certification course or take a community education class to build a new skill. If there’s a career-advancing move you’ve been wanting to make but didn’t have the money, your tax refund is the perfect solution. Anything that drives your career forward is bound to help you gain financial success far into the future!
Donate to charity
Donating money to worthy causes can be difficult when you’re on a budget. Giving part (or all!) of your refund to a charitable cause can make you feel good while providing an important benefit to society. Plus, you can claim contributions as tax deductions in the future. It’s a gift that can keep on giving!
Finally, if you’ve gotten a larger tax refund than you expected, you might want to consider adjusting your W-4 form. A large refund is an indicator that you’re probably having too much tax withheld. Keep more money in your pocket by adjusting your withholding allowances. It will mean more money in your paycheck throughout the year with a smaller refund at tax time.
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