8 Great Ways to Spend Your Tax Refund
If you’re expecting a tax refund this year, you might already be dreaming of your cash. But before committing to the first idea that comes to mind, it’s wise to consider your options.
1. Create an Emergency Fund
OK, so we’re not starting off with the most exciting idea. But if you do have an emergency, having backup funds can make you look like a genius.
Consider putting some, if not all, of your refund into a special emergency account. If you do not have an existing emergency fund, earmarking your tax refund could be a wise option. Open up a Savings Account that you are committed not to withdraw from unless there is a real emergency.
2. Catch up on Old Bills
If you’re behind on your bills or have had medical collections, your refund can be a lifeline to getting back on your feet. If you’re overdue on a mortgage or vehicle loan, your refund might prevent you from losing your house or car. You’ll also save money on interests and/or other penalties, as well as potentially stopping future damage to your credit report.
3. Pay down Credit Card Debt
According to Forbes, the average American household has over $15,000 in debt. If your APR is in the neighborhood of 15%, putting $2,700 towards the debt could shave over eight years off the payoff date and save $17,000 in interest.
Also, if you have an outstanding payday loan, paying it off should be near the very top of your list.
4. Put into Savings
Start an individual retirement account or contribute to an existing one. It may provide an additional bonus of a tax deduction, increasing your tax refund further in the long run.
If you’ve maxed out your retirement accounts, U.S. Savings bonds are another option for tax-deferred growth. Series I Savings Bonds are currently yielding 2.76%. Rates are adjusted semi-annually for inflation.
But keep in mind, you can’t cash them in for the first 12 months. You’ll also lose the last three months of interests if you redeem them within five years of issue.
If you have kids, you’re probably well aware of the skyrocketing cost of tuition. By contributing to a 529 fund, you’ll help defray to cost of college while also getting a tax break.
For savings advice from a professional, your community bank could be a good bet. With local roots, these banks often provide more personalized service. In the Central Virginia region, the Bank of Southside Virginia offers a wealth of expertise.
5. Stash for Upcoming Expenses
A little forethought can go a long way. It may be more exciting to buy a flatscreen TV. But first, consider if you have any likely upcoming expenses.
For instance, maybe your car will need new tires. Perhaps your dishwasher is on its last legs. Unexpected expenses often create financial burden. By getting ahead of the game, you could be thanking yourself in the near future.
6. Use on Home Repair
Your home is an investment and probably your most valuable asset. So it makes sense to stay up on repairs and replacements.
Also, spending that money now could save you in the long run by not ignoring a potential issue.
7. Travel Somewhere Exciting
Maybe you have your debt under control. While this may seem like an imprudent suggestion, according to US News and World Report, research shows buying experiences versus material items provides greater long-term happiness. You could be contributing to a lifelong memory for you and your loved ones.
8. Give to Charity
It’s hard to put a price on feeling good about yourself by helping other. If you have no pressing expenses, you may consider giving to a worthy cause. Your gift could even lessen your tax burden next year if your deductions are itemized.
Or Opt to Spread the Love
If you’re choosing between responsible and fun-loving, it doesn’t have to be one or the other. You could go half and half. Or any other fraction you so desire.
Obviously, it’s smart to limit your debts and save for a rainy day. But you may be able to put aside a few of those bucks for a nice dinner or weekend getaway.
Not to Withhold: One Last Thought
Sure we all love getting a lump sum of cash. But keep in mind, your windfall means you paid more in taxes than you owed. Translation: you gave the government an interest-free loan.
If you receive significant refunds on an annual basis, you may consider adjusting the withholding allowances on your paycheck. On a bi-weekly basis, you may be giving yourself a raise.
There’s a wide spectrum between pleasure and prudence. By considering a variety of options for your tax refund, you’re able to make a more informed decision.