Tax season is in full swing and has even been extended to July 15, 2020 this year. Is this year’s return looking good for you? Whether you’re looking to get a couple hundred or a couple thousand dollars back, pump the brakes a little before deciding what to do with your tax refund.
While there’s nothing wrong with rewarding yourself with some glory shopping, blowing your entire tax refund on stuff you don’t need is hardly advisable. The truth is, 78 percent of American workers live paycheck to paycheck. Learning how to use your tax refund wisely could break that pattern.
If you want to know what to do with your newfound money that could provide long-term benefits rather than short-term excitement, keep reading.
1. Create an Emergency Fund
Keeping the world’s current events in mind, it’s easy to see that you can never be over-prepared. Whether you’re being sent home from work due to a widespread virus that has the world turned upon its head, or suddenly have emergency veterinary bills, an emergency fund never goes out of style.
As suggested above, most Americans don’t have thousands of extra dollars lying around to cover emergency financial situations. Try to start with at least $1,000 and build up your emergency fund to cover a few months of living expenses.
2. Put It in Savings
The average US citizen has $38,000 of personal debt, which doesn’t include mortgages. We’ve been raised in a society that encourages immediate satisfaction, rather than patience. When thinking about what to do with your tax refund this year, consider putting it towards a savings account.
In savings, the money can even start to build some interest of its own. When it comes time to pay for a vacation, replace your old car, or renovate your home, you can pay for it in cash, rather than using credit.
There are people who start investing in their 30s and 40s and are millionaires by the time they retire because of their investment practices.
Figuring out what to do with your tax refund may mean putting it in savings until the time is right to invest it in stocks or an individual retirement account (IRA). A Roth IRA in particular is beneficial because you aren’t taxed when withdrawing funds. This is because the money put into a Roth IRA has already been taxed.
4. Put It Toward Your Mortgage
Did you know if you make an extra mortgage payment each year, you save thousands of dollars over the life of the loan? When you get your tax refund back this year, consider putting most of it, if not all of it, into your mortgage.
Make sure you put the money towards the principal amount on the loan to help pay it down even faster. However, contact your mortgage company to ensure they accept principal-only payments.
They may also have penalties for paying your loan off early, so make sure you’re not setting yourself up for penalty fees by being wise with your tax return.
5. Pay Off Debt
Consider using your tax refund this year to pay off any debts you have, like retail-specific credit cards (given by stores), personal loans, credit cards, and more. Paying down these loans can also help boost your credit score.
6. Invest in Personal Growth
When you’re thinking about what to do with your tax refund, consider your life goals.
If you have dreams but require more education or additional certifications, using your tax refund is a great way to cover these expenses. While most tax refunds won’t cover several years of college, every dollar helps.
You could also use this money toward changing your career path if necessary. For example, if you’re a fitness enthusiast and want to help other people reach their health and fitness goals, you could use your refund to get certified as a personal trainer.
7. Give Back to the Community
In the US, we often take luxuries for granted. In some countries, not everyone has access to clean water, food sources, medical services or even a roof over their head. However, that doesn’t mean there aren’t people suffering right here at home.
Consider using some of your tax refund to give back to the community or to a cause you believe in. Additionally, a documented donation to charity is also a tax credit, which will help you get more money back again next year, assuming you itemize your deductions.
8. Invest in Your Child’s Education
Finally, consider putting a tax refund towards your child’s future. By starting a savings fund, such as a 529 Plan or a Uniform Transfers to Minors Act (UTMA) account, you can help them pay for education later.
Some college saving funds act like stocks and bonds that earn interest over time, while others work by prepaying for individual credits at specific colleges.
Need More Help Figuring Out What to Do With Your Tax Refund?
No matter how much money you get back this year, we recommend doing something wise or advantageous to your future. However, it doesn’t have to be all or nothing. Figuring out what to do with your tax refund could mean putting 80 percent toward savings and 20 percent toward updating your wardrobe, for example.
Finally, we realize money isn’t always available and a tax refund might not be enough to help you cover emergency expenses. If you need extra funding, we can help. Check out our online loans to see how we can help you.