8 Financially Responsible Ways to Use Your Tax Refund
It’s tax-refund season! How are you going to spend the pile of cash from Uncle Sam?
Of course, you can use some of your tax refund to indulge responsibly. If you’ve been wanting to buy yourself something special for a while or to spend on an experience you generally cannot afford, by all means, you can allow yourself to use some of your tax refund for your chosen treat. Indulging occasionally and mindfully can prevent feelings of deprivation and can actually help you manage your money better.
However, before you go out and blow your entire refund on an expensive weekend, take a step back and try to determine the most financially responsible approach you can take with this money. Instead of spending all the funds on short-term indulgences, consider using some of them to improve your overall financial wellness. To help you get started, we’ve compiled this list of eight financially responsible ways to use your tax refund this year.
- Build or boost your emergency fund
Having a well-endowed emergency fund is a crucial component of your financial health and stability. If you don’t have a fund with three to six months’ worth of living expenses set aside to cover unexpected events, work on setting one up now. Use some of your tax refund to start building your emergency fund or boost an existing one.
- Pay down high-interest debt
High-interest debt can kill the best of budgets. If you’re carrying outstanding debt with high interest charges, consider using some of your tax refund to start paying it down. Decreasing your debt amount means more of your monthly payments will go toward your principal instead of interest. Additionally, knocking off a big chunk of your debt can potentially help you move to a lower interest rate.
- Invest in your education
If you’ve been looking for a way to advance your career and increase your earning potential, this may be your chance. Consider furthering your professional education by allocating some of your tax refund to career workshops, conferences, or additional certifications. Enhancing your qualifications and learning new skills can be the keys to significant raises or a promotion at work, which will pay off for years to come.
- Feed your savings
It’s always a good time to boost your savings, and tax refund season is no exception! Set aside a portion of your refund for your long-term savings to help you move closer to your financial goals. The IRS actually allows you to split your refund into three separate accounts via direct deposit to make this easier. You can have a third of your refund go directly into a savings account before you even see it arrive.
- Prepay your mortgage
Making an extra mortgage payment or two can be a fabulous way to free up some money for the long term. Reducing the principal can have an exponential effect on your loan since so much of it goes toward interest over the life of the loan.
- Make home improvements
Spending some, or even all, of your tax refund on improvements that increase the value of your home is an investment in your equity. In particular, kitchen facelifts and home expansions tend to offer a larger return on investment when the home is sold.
Another kind of home improvement to consider at this time is energy enhancement. For example, you can swap out older appliances for newer and more energy-efficient models or even choose to have solar panels installed on your roof. Energy improvements will save you money each and every month.
- Start or contribute to a college fund
If you have children or plan to start a family in the future, consider allocating a portion of your tax refund to a college savings fund. A 529 savings plan, which is a tax-advantaged account specifically designed for education expenses, can help alleviate the financial burden of college in the future. Contributions to a 529 plan may be deductible on your state taxes, and earnings are tax-free when used for qualified education expenses.
- Invest in your retirement
If eligible, consider allocating a portion of your tax refund to your employer-sponsored 401(k) or an Individual Retirement Account (IRA). These contributions not only provide potential tax advantages, but they also harness the power of compounding, thus allowing your money to grow more over time. The earlier you start investing for retirement, the more you can potentially accumulate for your golden years.
There are so many things you can do with your tax refund that can benefit your financial health. Use our list for some fabulous ideas, or come up with your own financially responsible ways to use your tax refund.
