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 have fewer regrets in the long run. Your tax refund can reduce stress throughout the year and can even help set you up for future financial success—allowing you to indulge in a worthy goal.
Here are four financially smart ideas about what to do with your next tax refund:
1. 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 lowering stress. For the most substantial 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. Strategically paying down your debt could save 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. This feeling of relief can be encouraging and motivate you to continue to work down other debt.
2. Save for an emergency
Everyone needs a savings account. An emergency savings fund will be there for you when times are tough. Unfortunately, many Americans’ bank accounts are lacking. Approximately 40 percent of American adults don’t have $400 saved to cover an emergency expense.
Setting aside money for emergencies can save your finances in the long run. For example, if your car breaks down and you’re unable to repair it, you may end up having to spend extra on food delivery and ride-sharing services—or even experience a disruption in income by missing work, further compounding a problematic situation. In addition to the expense of a repair, these extra costs can seriously hurt your wallet.
Here are a few tips for creating a savings plan:
- Pick a reason for saving: This could be a rainy day fund or a target dollar amount to cover emergency expenses.
- Set a target goal and determine how long it will take to save: For example, if you decide to save $400, you could plan to set aside $10-50 a week until you reach your goal.
- Find ways to save: If you’re having difficulty finding additional sources of income, look for places in your budget where you can make cuts. For instance, you could decrease the number of coffees you buy each week until you meet your target.
Once you reach your initial savings goal, consider setting a higher target. Having three months of living expenses in your savings account can give you greater independence if you lose your primary source of income, for instance. It’s OK to start small—making saving a habit is the only way to make progress toward your savings goals.
3. Start investing
If you’re comfortable with your debt level and the current state of your emergency savings fund, consider using your tax refund to invest. When you invest your money, you can build your wealth. Investing can help you prepare for significant expenses down the road, like retirement, college, children, or a home.
Are you ready to start investing but not sure where to start? That’s OK. A financial advisor can show you how to make the right investments for your situation. These professionals can help you build a portfolio, even if you’re just getting started.
If you need help finding the best way to spend your tax refund, consider having a conversation with one of our Financial Advisors*. Get your complimentary consultation today.
4. 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. Or check out our community impact stories to learn more about recent donations from OnPoint.