Are you expecting a tax refund this year? If so, you could use it to improve your finances, boost your personal skill set or make other meaningful improvements to your life this tax season.
From paying off debt to advancing your education, here are some great ideas for what to do with your tax refund:
- Pay down existing debt
- Start or build up an emergency fund
- Save for retirement
- Take care of car repairs or home improvement
- Talk to a financial advisor about investing
- Invest in yourself
Let’s explore these options in detail so you can decide how to use your tax refund.
Pay down existing debt
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’ll pay over time2. The more you pay down the principal balance of an outstanding debt, the lower your monthly payments may be going forward.
It makes sense to pay off certain debts before others. For example, you might want to pay off credit card debt before a car loan, since credit cards typically have much higher interest rates.
If your credit cards are paid off, look at some other debts you may have, such as student loans or a mortgage. Making some additional payments toward the principal on these types of loans could potentially save you a lot of money and give you greater peace of mind.
One thing to remember: 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 better 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. When you save money in anticipation of problems before they occur, it’s like having an insurance policy against the curveballs life inevitably throws at you.
There is no downside to doing this. If you don’t already have an emergency fund, your tax refund is the perfect opportunity to get started.
Save for retirement
When thinking of smart ways to save for retirement, the money from your tax refund 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 contribution.
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, for 2019 individuals can contribute up to $6,000 per year into these accounts or $7,000 per year if you’re age 50 or older. If you think you need guidance with your retirement savings, consider speaking to a financial advisor (more on that in a minute!).
Take care of car repairs or home improvement
Think about any issues around the house or with your car that you may have been putting off dealing with. Perhaps these are issues that are not exactly an emergency but will still be somewhat expensive to fix. The sudden injection of cash you receive from your tax refund is a great opportunity to address some of these lingering problems you haven’t dealt with.
When you’re done, you’ll have a problem solved and a weight off your mind.
Talk to a financial advisor about investing
If you are already on track to make the maximum contribution to your retirement account for the year, you may want to consider speaking with a financial advisor about other kinds of investments.
Wisely chosen stocks, commodities and bonds can provide you with dividends that you can add to your savings. If you don't want to research these items yourself, things like mutual funds, index funds and ETFs allow you to invest in many assets at once. Many are specifically designed for those who don’t want to take too many risks, so don’t think that investing is just a game for adrenaline-fueled day traders.
With any investment you are considering making with the money from your tax refund, it is best to speak to a professional financial advisor who is qualified to give you personalized advice.
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.
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.
This article has been updated from its original posting on March 22, 2017. Matt Diehl contributed to this article.