For most of us, tax day has come and gone. For those who have already received, or are still expecting a refund, you might be contemplating how you’ll spend it. Have you ever used your entire refund on something frivolous and then wondered what happened? Many people tell themselves they deserve a treat, or they’ve earned the right to splurge. That may be true; however, if you choose to spend your refund wisely, you’ll likely suffer fewer regrets in the long run. Your tax refund can reduce stress throughout the year, and it can even help set you up for future financial success (which is a goal worth indulging).
Here are four financially smart ideas about what to do with your next tax refund:
Pay down debt
Not the most exciting way to spend money, but if you’re dealing with debt right now, your tax return could speed up the process of paying it down. Fewer bills and lower debt is a fast track to decreasing stress. For the largest long-term impact, be strategic. Determine which debt is costing you the most, find the highest interest rate, and put a dent in that debt. This could save you a lot of money in interest payments over time.
On the other hand, if you have a smaller debt you can wipe out with your return, you could eliminate one of your monthly payments. One payment off your shoulders could provide some breathing room for your monthly budget. The feeling of relief can be encouraging and motivate you to continue to work down other debt.
Save for an emergency
Everyone needs a savings account. An emergency savings fund will be there for you when times are tough. Unfortunately, many young Americans’ bank accounts are lacking. The median checking account balance for people 35 years old or younger in 2013 was just $1,200. The median savings account balance for that same age range was $1,580, according to Value Penguin.
The challenge with emergencies is that they’re unexpected. You do not know what will happen when it’ll happen or how much it will cost – and that makes it hard to save. That’s what makes saving your tax refund so convenient. It’s not a part of your normal budget, so all you have to do is set it aside and not spend it.
How far can your current savings take you? If your car is totaled, you’re injured, or you lose your job, can you afford it? When you factor in rent/mortgage, utilities, groceries or an expensive car repair – savings can dwindle quickly. Pad your accounts with this year’s tax return so you can use it when you need it most.
If you’re comfortable with your debt level and confident about your emergency savings fund, consider using your tax refund to invest. When you invest your money, you can build your wealth. This can help you prepare for major expenses down the road, like retirement, college, children or a home.
Not sure where to start? That’s OK. A financial advisor* can help you learn about making the right investments for your situation. These professionals can help you build a portfolio, even if you’re just getting started.
Donate to a charity
When you feel good about your finances, you may consider using this money to give to a good cause. Choose a cause you’re passionate about and a charity that’ll use the money well.
To pick the right charity for you, first determine which issues resonate with you most. Are you concerned about education in your community? Do you want to help people with limited access to water in other parts of the world? Are you an animal lover who wants every puppy to have a nice home?
Once you know the general cause you want to contribute to, seek out organizations that make a real difference in those areas. Need help finding a good charity? Try GuideStar, Charity Navigator or Philanthropedia.
If you need help finding the best way to spend your tax refund start a conversation with one of our Financial Advisors*. Get your complimentary consultation today.