Are you expecting a tax refund this year? If so, you could use it to improve your finances or boost your personal skill set.
From paying down credit card debt to advancing your education, here are some smart ways to use your tax refund:
Pay down existing debt
If you have debt that you’re trying to pay down, the money from your tax return could be helpful.
The reason is simple: the lower your principal balance, the less you pay in interest1. If you can make an extra payment on the principal balance using your tax refund, you’ll reduce the interest you have to pay over time2. The more you pay down the principal balance of an outstanding debt, the lower your monthly payments may be going forward.
Before you make an extra payment on your balance or pay it off entirely, make sure you won’t run into fees or restrictions. Read the terms of your agreement or talk to your credit provider directly to understand the rules regarding extra payments and how they’re applied to your debt.
Start or build up an emergency fund
Whether you start a new fund or add to an existing account, an emergency fund could help put you in a position to handle the unexpected. If you don’t have money saved up for a sudden expense, you may have to use a credit card or borrow from your retirement savings. This could result in more money spent due to potential interest, fees or penalties.
In addition to financial support, emergency funds can offer peace of mind. Here are some common uses for an emergency fund:
- Medical bills
- Home repairs
- Car repairs
Save for retirement
When thinking of smart ways to save for retirement, the money from your tax return can be very useful.
For example, if you have a work-based retirement plan, see if you can make extra contributions. Depending on the type of retirement plan, the money you put in may also be tax deferred and could double in amount if your employer matches your return.
If you don’t have a retirement plan through your workplace, you may consider looking into opening a traditional or Roth individual retirement account (IRA). According to a recent article by the IRS, individuals can contribute up to $5,500 per year into these accounts or $6,500 per year if you’re age 50 or older. If you think you need guidance with your retirement, consider speaking to a financial advisor.
Invest in yourself
From personal goals to professional ambitions, investing in yourself may be another wise use of your refund money. For instance, if you pay for a series of cooking classes and start to cook your own meals at home, you could save money over time by eating out less. On a similar note, if you buy a membership to a professional club or organization in your field, it might increase your networking opportunities and help advance your career. No matter what you choose, the return on investment could be an improved quality of life today and in the future3.
If you’re interested in improving your personal strengths, here are some additional ways
to invest in yourself:
- Advance your education
- Learn a new language
- Learn an instrument
- Join a health club
Do what’s best for you
Whether your tax refund is a significant or modest amount, it may provide you with an opportunity to better your personal finances and much more. As you weigh your options, consider the potential benefits and make the best decision for you.