Tax season is coming to a close and for many, that means a refund could be on its way. Receiving a tax refund can feel like you won the lottery: it can be tempting to splurge on a tropical trip or the latest gadget. However, if you’re looking to make the most out of your return, there are some smart ways to spend it that can benefit you in the long run. While it’s important to prioritize supporting your family by sending money back home, consider these five financially savvy options if you have extra funds at your disposal.
Pay off debt
If you have high-interest debt, such as a personal loan or credit card debt, using your tax refund to pay it off is a wise choice. High-interest debt can be a financial burden, and paying it off is sure to help save you money on interest charges long term.Start by paying off your debt with the highest interest rate first, as this will help to reduce your future interest charges.
It’s important to note that paying off debt with your tax refund not only helps you save money in the long run, but can also improve your credit score. By reducing your debt-to-income ratio (how much you owe each month compared to how much you earn), you can boost your credit utilization rate (the amount of credit you use versus how much credit you have total), which can positively impact your credit score. This can make it easier for you to access credit in the future, like for a mortgage or car loan.
Build your emergency fund
An emergency fund is an essential part of any financial plan, and it is never too late to start one. Most emergency funds aim to save at least three to five months worth of expenses. These funds can help you cover unexpected expenses without having to rely on loans or credit cards. If you don’t have an emergency fund, now is a great time to start one.
By having a sufficient emergency fund, you can weather unexpected costly situations, such as a job loss, medical bills, or car repairs without damaging your long-term financial health. If you use your tax refund to bolster your emergency fund, you can ensure you’re prepared for whatever life throws your way.
Invest in your retirement
Using your tax refund to invest in your retirement is a smart move that will pay off in the long run. If you have a 401(k) or IRA, consider using your refund to max out your contributions for the year. If you don’t have a retirement account, consider opening one and using your refund to make an initial contribution.
Investing in your retirement with your tax refund can provide you with significant benefits, such as tax advantages and compounding interest. By contributing to a tax-advantaged retirement account, you can potentially reduce your taxable income for next year’s taxes. Additionally, your contributions will grow tax-free or tax-deferred, meaning you won’t have to pay taxes on your investment gains until you withdraw the money in retirement.
Pay for a major expense
If you know you have a major expense coming, such as a wedding, quinceañera, buying a home, or your child’s tuition fees, your tax refund can be a welcome relief. By paying major expenses upfront, or at least partially so, you can avoid taking on additional debt and paying interest fees. Using your tax refund to make essential home improvements is also a solid option. Consider making upgrades that will save you money in the long run, such as installing energy-efficient appliances, hiring a professional for plumbing maintenance or upgrading your insulation.
Your tax refund is also a great opportunity to take care of those nagging expenses in the back of your mind, especially ones you know tend to be pricey. Think auto repairs, appliances or furniture; expenses that are necessities, not nice-to-haves.
Invest in yourself
Investing in yourself can have huge financial implications for your future. Consider using your tax refund to take a course or attend a conference that will help you develop new skills or advance your career. Alternatively, you could use your refund to start a side hustle or invest in a skill or hobby that you’re passionate about. By developing new skills, you can make yourself more marketable to employers, increase your earning potential and score higher salaries, promotions, and job opportunities that may not have been attainable before.
Besides creating a new stream of income, starting a side hustle or investing in a hobby can give you a sense of fulfillment and happiness, which can positively impact your overall well-being (a worthwhile investment if there ever was one). Use your tax refund to front your start-up costs. For example, if you have a knack for photography, a high-quality camera can make all the difference, or if you’re a greenthumb and want to get into landscaping, some new tools might be a good investment.
A tax refund is a great opportunity to build your finances. We all feel the urge to finally take that vacation or revamp our wardrobe, but by keeping one eye on the future, you can use your refund to make meaningful progress toward your long-term goals.
