By Kelly Hodges
Tax season is upon us, which means that Uncle Sam will be doling out checks to many American households in the months to come. Getting a tax refund always feels a bit like a windfall- an extra lump of dough in your account just for filling out a bit of paperwork! Although it’s tempting to blow the wad on something fun and frivolous, there are a few more practical uses for that money that your future self will thank you for! Here are my top 5 finance friendly ideas for how to use your tax refund this year.
1. Pay Down Debt
Take a look at your list of debts, figure out which has the highest interest rate, and throw your entire refund check at it! Credit card debt is the obvious one, but car payments, student loans, or any other type of accounts where you are charged interest count as well. Carrying debt (especially credit card debt) makes it very difficult to get ahead financially. A tax refund as well as any other extra funds should be dedicated to debt repayment until it’s gone.
An emergency fund is money in an account that is easily accessible in case of emergency. The emergency fund is a safety net for when life doesn’t go quite according to plan- when the car dies, a huge medical bill arrives, or you lose your job. Everyone’s definition of what constitutes an “emergency” will be a bit different, as will the amount of money that is “enough” for the fund. The bottom line is, if you don’t have an emergency fund a tax refund is a perfect way to start one. If you do have an emergency fund, this is a great time to reevaluate if the fund has enough to cover you if true disaster strikes. Could you cover your expenses if you lost your wages for a month, 3 months, or 6 months?
3. Save for Retirement
If you’ve been neglecting your retirement savings, a tax refund is a great way to give those accounts the attention they deserve! If your employer offers a 401k or 403b matching program, make sure that you’re taking full advantage and not leaving free money on the table! If not a traditional or Roth IRA is another good place to put that money. I’ve never met anyone who regretted saving too much for retirement, so throwing that extra dough into a retirement fund is a decision that your future self will thank you for!
4. Save for College
Whether your kids are in high school, grade school, diapers, or still in the womb, it’s never too early to start saving for college! We all know the huge price tag that goes along with that college diploma, so starting early and contributing regularly will make a huge difference when it comes time to write the tuition check. Even a few thousand saved today will eventually translate to less student loans for your child, and less interest paid on those loans over the long term. Whether you use a 529 plan, a Roth IRA, or another vehicle for savings, investing in your child’s education is always a smart decision.
5. Fund a Goal
Big or small, everyone has goals. Whether it’s a summer vacation for your family, replacing your old car, or getting a new roof for the house, all these goals will cost money. Saving in advance to fund a goal means that when it comes time to pay for it you have the money to do so. That family vacation will be so much more enjoyable knowing that you won’t be paying it off for the next 3 years! Evaluate what your own goals are, and use that tax refund money to start making it a reality.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of her employer or any other person or entity.