How Should I use my Tax Refund?
When you receive a significant amount of cash, whether it’s from a tax refund, work bonus or a gift, it’s always a good idea to be proactive about how you’ll spend it instead of letting it disappear before your eyes because you didn’t plan ahead. Below, we’ve listed some dos and don’ts for you to consider as your tax refund rolls in.
Do: Pay Down Debt
You probably don’t want to see your entire refund go straight to your credit card bill, but it’s something worth considering. Assess your debt and determine what amount of your refund you can put toward paying down high-interest debt. The money you save on interest will impact your bottom line and you’ll be able to pay off your debt sooner than you’d planned – freeing up more money on a monthly basis.
Don’t: Lend Out Your Refund
We’ve all had a friend or relative who found themselves in a tight spot, but lending out your refund is not the smartest idea. You might not see that money for a while, and if you do, it’ll likely be repaid in small amounts instead of the large chunk of cash you have now. Plus, you run the risk of never seeing that money again.
Do: Start Saving or Investing
If you’ve been waiting until you have a substantial amount of cash in hand to start a savings account or an emergency fund, you’ve just run out of excuses! Saving for emergencies should be one of your top priorities, so set aside as much as you can for the “what if” scenarios. What if your car breaks down? What if the washer or dryer stop working? What if someone is unexpectedly out of work?
And don’t stop with your refund! You can set up an automatic transfer to take money out of your checking account each month to help it grow, even if you can only afford as little as $10 at a time. The headstart you’re getting now along with the small monthly contributions will add up quickly.
If you feel confident with the amount you have in savings already, use this opportunity to start investing. Just say you receive an annual refund of $2,800 and invest this money at 6% interest. It may not seem like much to invest at this moment, but if you continue investing the same amount each year, you’ll find yourself with approximately $250,727 in 30 years’ time. Now that’s making your refund work for you!
Don’t: Invest in a Low-Interest Account
If you decide to sock away some or most of your refund money, don’t be lazy about it. Keeping all of that cash in a low-interest savings account or an ordinary checking account with little to no interest at all will dramatically decrease its growing power. If you’re not sure where to invest or how to save your refund, just give us a call and we can help guide you in the right direction.
Do: Invest in Yourself
We’re not talking about a new wardrobe here, either…although it’s always nice to reward yourself when you can. Think about ways you can advance your career and increase your earning power by using your tax refund to pay for a work-related conference, additional training in your field or for learning an entirely new skill. Money invested in yourself is never wasted!
Don’t: Blow it all on Impulse Buys
If you live paycheck-to-paycheck or are used to sticking to a budget, it can be tempting to swipe your card on things you want, but don’t really need. Plan ahead and choose a set amount that you can “blow” on fun purchases. The key is to plan and set your priorities so that you don’t find yourself in a bind on bills with a new big screen TV taunting you each day.
Do: Donate to Charitable Causes
For even the most well-intentioned people, donating to charity can take a back seat on their list of priorities. This might be a great time to give back to that organization that has either made an impact in your life or that you’ve seen make an impact for someone else. The bonus cash in your pocket gives you the opportunity to give back to your community in ways you might not be able to afford throughout the year. Plus, it gives you a head start on potential deductions for next year if you plan to itemize.
Don’t: Receive Your Refund on a Gift Card
Most returns are processed and deposited electronically – eliminating paper returns and checks you have to deposit in-person. Many tax services will even offer you the opportunity to get the refund via gift card. While direct deposit is fine, if you’re offered your refund on a gift card, say no. You always stand the chance of losing the card, plus the fund aren’t as easily accessible.
However you choose to spend your refund, consider all of your options carefully before making your decision and you won’t have any regrets.