If you’re one of the 80% of taxpayers who will be receiving a tax refund this year, chances are you’re debating what to do with the money.
While you can probably imagine plenty of places to put your prized refund check today, you might not be thrilled with the choice tomorrow.
Rather than spend all of your money frivolously, why not use it to boost your bottom line? Here are some of the best ways to put your tax refund to good use this year:
1. Dump Your Debt
First up, take care of your debt. If you’ve been carrying around high-interest credit card debt for years, using your tax refund to pay it off should be a no-brainer. Sure, parting with a big chunk of money all at once might be painful. However, it’s certainly worth what you’ll save on interest. Your refund might not even cover the entire debt in one fell swoop. But making a serious dent in what you owe is better than nothing.
2. Establish an Emergency Fund
Don’t have spare change in case your car breaks down? Set up an emergency fund beforehand so that you have something to dip into when life goes awry. A good rule of thumb is to set aside three months worth of pay as a cushion. Having an emergency fund doesn’t mean you’re a pessimist, it simply means that you’re being smart and practical with your money. Future You will thank you for not making a stressful time even more stressful!
3. Build Your Savings Account
Once you’ve paid down high interest debt AND have an emergency fund, it’s time to start building your savings account. This is the fun part, because you can start dreaming about all the different things you want to eventually purchase!
Some people prefer to open a separate savings account specifically for each item they are saving for, or designate various columns in the same account to keep track. Do what works best and makes the most sense to you.
Here are some ideas of what you might start saving for:
- A down payment for a home
- Being able to pay for your next car in cash
- A family vacation
- A much-needed remodel or repair for your home
- College tuition for your children
Your tax refund is an excellent resource to jump start any of the above goals, but if you want an even healthier savings.
4. Invest in Your Refund With a CD
Want even more interest on your saved refund? A Certificate of Deposit (CD) can deliver. Typically, longer-term CDs offer the highest savings rates, but even short term CDs are gaining high returns historically.
At the end of the CD’s term, you can cash out or renew your CD to generate even more interest.
Whether you choose an 11-month CD or a five year one, each year, this year’s tax refund would grow even larger.
A CD is a great place to invest safely, keeping you from spending your return too hastily and earning you interest simultaneously.
5. Save for Retirement
If your credit card debt is non-existent and you’ve got several months’ worth of living expenses saved up, consider yourself ahead of the pack. To strengthen your financial position even further, consider putting your tax refund into an individual retirement account (IRA). There are two different kinds of IRAs: Traditional or Roth IRAs. If you don’t already have one established, why not use this opportunity to start one?
As long as you meet certain income requirements as defined by the Internal Revenue Service (IRS), you’re entitled to open a Roth IRA even if you already have a 401(k), 403(b), or another employer-sponsored retirement plan.
6. Treat Yourself
If you still have some of your refund available and feel comfortable with your financial situation, it’s okay to splurge a little. Add to your summer vacation fund or a nice dinner with your family can be a great way to have fun with your extra cash.
Remember, a tax refund isn’t free money. It’s your money—and you worked hard to earn it. So don’t waste it. Look at your financial situation, talk with your spouse or a friend, and be smart with the money. It could make a big difference in reaching your retirement dream!