It is almost time to start filing taxes and that means that it is almost tax refund season as well! Tax refunds are not free money and should not be considered as such. Taxpayers should instead think of it as money that they overspent that could have been utilized, not as a means for extra splurging. There is only short-term value in a shopping spree, so here are some smart ways to use tax refunds that will provide some long-term value.
Save for emergencies. It is important to always have money set aside for emergencies because they can happen at any time and there is no way to predict how much that emergency will cost. To be safe, this fund should have about six to eight months’ salary worth that is easily accessible. This can either be through a savings or money market account. While a percentage of every pay check should be deposited into this fund, it may take years to earn six to eight months’ worth, therefore the tax refund will deposit contribute a significant amount.
Pay debts. Having debts such as student loans, mortgages, or even car loans, a tax refund is a good way to pay off a large amount of the principal balance without having to pay interest. It is especially beneficial to pay towards debts that have a high interest rate like a private student loan. This will allow people to reduce the future amount that they would have to pay in the future. Even if the loans are private and do not have high interest rates, it is beneficial to get several payments ahead to reduce the amount of payments that will need to be paid in the future.
Buy something that is needed. If one is having car trouble or needs dental work, a tax refund is a good way to pay for, or towards, large expenses that cannot be pushed off much longer. Day to day expenses, like food or rent, may take priority with regular paychecks but a refund is a good way to pay for essentials that are a little more expensive.
Donate to charity. With tighter budgets, as mentioned, the day to day expenses take priority over other items that people need to spend money on. However, with a tax refund, there might be a new opportunity to give back to the local community in ways that people were unable to do so previously. Not only will this make the donator feel a sense of pride, but it also serves as a benefit to society. This donation, if claimed, can be used as a tax reduction in the future as well.
Invest. Investing is a good way to turn money into more money. Whether a small amount or the full amount of the tax refund is used to invest, the money will start multiplying over time and create more than what was originally earned in the refund to begin with. Investing in stocks is an easy and common way to get started. There is also the possibility for people to invest in taxable accounts. These accounts may include brokerage accounts, index funds, or even mutual funds. These are typically diversified investments that have low expenses and will again start to earn more money than the refund originally provided.
Open an IRA. It is never too soon to start saving for retirement, and the sooner the better. If people start saving small amounts at a young age, they will ultimately save more money in the long run because of compounding interest as compared to someone who started saving more money later. The longer money sits in an investment account, such as an IRA, the more interest it will accumulate. This is one of the safest and most dependable ways to start saving money as well.
Create a fun spending account. While it is important to ensure that needs are being met, it is also important that people have fun and relax as well. Whether that means going on vacation, starting a new hobby, or even learning an instrument, it’s necessary to spend money on things that make us happy. Creating a separate savings account that a tax refund can be deposited into will allow for there to be a guilt free way of having fun.
These tips allow for the refund money to be set aside and used for long-term future needs and wants rather than to short-term luxuries. Doing something that is fun and makes you happy is also important – just be sure to spend within your means and to resist unnecessary spending.