Tax time can be all kinds of boring until you find out you’re receiving a refund. The sudden influx of cash makes many Americans feel like they’ve got money to spend, and as quickly as it gets direct deposited into the bank, it’s taken right back out through impulse purchases.
Instead of spending the money on something you probably don’t need anyway, consider using your tax refund in one of these financially-savvy ways:
- Bulk up your emergency fund. If you’re in a paycheck-to-paycheck situation on a continuous basis, having a small amount stashed aside in an emergency fund will help ease some of the strain in case the unexpected does occur.
- Pay off debt. If you have credit cards, car loans and/or student loans, target the debt with the highest interest rate and put your refund toward the balance. This will expedite your debt paydown plan.
- Open a Roth IRA. The earlier you start saving, the more time your money has to grow. Consider opening a Roth IRA (if you qualify) and putting the money toward your future.
- Invest in yourself. If you’ve been considering taking a class or course that will enhance your skill set, consider putting your tax refund toward it. This will allow you to enrich your education, which may enable you to earn a higher income.
- Give it to charity. Pick a non-profit that aligns with your values and the impact you want to make on the world and consider donating your tax refund. You may be able to deduct your contribution from this year’s taxes.
- Top off a savings goal. If you’ve been saving for a home down payment, new car or other goal, consider using this money to build your savings account. The faster you reach your savings goal, the faster you’ll be able to reallocate the cash flow going toward it to your next highest priority.
- Consider opening a 529 plan for your child. While retirement savings should take precedence over college savings (because you can take out scholarships and loans for school, but you can’t get a loan for your retirement), if you’re maximizing retirement savings, a college savings account could be a great way to start building money for your child’s higher education.
- Take care of your health. Life is stressful and one of the key ways of combating that stress is by taking better care of yourself. Consider applying your refund toward a gym membership, spin class or healthy cooking classes, which you can parlay into better overall physical and mental health. (The healthier you are, the more you save on items like health, life and disability insurance.)
- Invest in an experience. Often it’s not our possessions in life that make us happy, but the experiences we have with others. Consider investing your refund in a plane ticket to visit friends or family, a mini family vacation or a tank of gas for a road trip.
- Try a bit of everything. If you’re not sure which of the above to choose, consider following a split method with a 50/30/20 allocation. 50% will go toward debt paydown, 30% will go toward savings and 20% will go towards a splurge of some sort.
The biggest thing to remember when receiving money (whether it’s a tax refund, bonus or gift) is to be intentional with it. Don’t immediately spend it, but instead, consider how you can use the money to make the biggest impact in your life and try to maximize the amount.