“You’re getting a tax refund.”
Everyone loves hearing those words. Remember, your tax refund is NOT a bonus check from the government. Your refund is your money! It’s money that you overpaid to the government the previous year.
Sure, it might feel good to run out and buy a new TV, the latest gaming system, or designer shoes, but spending your hard-earned money on material things won’t improve your financial situation.
Treat your refund like an extra paycheck and save it or spend it wisely. Your tax return is your money—give your refund a purpose and think about your long-term financial goals.
Step 1 to Wisely Spending
Your Refund: Make a Plan
It’s no surprise how quickly a tax refund disappears if you put it in the bank without a purpose. It’s easy to spend a few dollars here and there, and before you know it, the money’s gone. Instead, take some time before getting your refund to figure out the best way to use it. That could mean catching up on bills, paying off credit card debt, and (even better yet) starting or adding to a savings account.
So, before you get carried away dreaming about that extravagant vacation or that stylish, expensive new coat, here are ways to set up your refund that will save you money in the long run and improve your future!
7 Ways to Use Your Tax Refund
1) Create an Emergency Fund
As we’ve all learned the hard way during the pandemic, financial emergencies can happen in the blink of an eye. One day you have a job; the next day, you don’t. One day everything is fine; the next day, your car breaks down and needs $900 worth of repairs. Or you may be hit with unexpected medical bills. There are hundreds of other reasons to have an emergency fund.
If you can’t save 6 months of living expenses, try to set aside at least 1 month’s worth. For example, if you spend $2,000 per month and have $4,000 in an emergency fund, it can keep you afloat for 2 months. Building the ideal 6-month emergency fund can take years, and using your tax refund is an excellent way to get started.
Consider putting your emergency fund in a separate, high-yield savings account. That way, you won’t see it every time you use your regular account and won’t be tempted to tap into it for luxury items.
2) Pay Off Credit Card Debt
Credit card debt is expensive, with interest rates as high as 25%. If you’re just paying the minimum each month, it’s costing you a lot of extra money. Plus, you will never be able to reach your long-term financial goals when you have credit card debt.
3) Pay Down of Pay Off Your Car Loan
Wouldn’t it be great to get rid of that monthly car payment? Once you pay off your car loan, don’t just find other ways to spend the money. Instead, have a plan and use the money for your emergency fund or pay off credit card debt.
4) Pay Off Other Unsecured Loans
Speaking of debt . . . using your tax refund to pay off loans–including payday loans, debt consolidation loans, and any high-interest loans–is also an excellent way to gain financial stability. Aim to pay off any debt with an interest rate of more than 6% as soon as possible.
5) Invest in Yourself
Another smart option is using your tax return to invest in your future, such as paying for continuing education classes or certifications to advance your career. Using the money to get a new certificate, degree, license, or another qualification can help you get a better job and a bigger paycheck. It can also free you if you feel trapped in a job that makes you unhappy. Thanks, tax refund!
6) Buy Better Health, Disability, or Life Insurance
If your job doesn’t come with health insurance benefits, or the benefits you have aren’t very good, take advantage of your tax refund to buy the best health insurance plan you can.
There are several choices for nonemployer benefits health insurance, including healthcare.gov, which offers policies to fit any budget. You might also consider adding a health savings account (HSA). You can make tax-free contributions to use for health-related expenses, so you don’t have to dig into your savings or come up with money quickly. Disability insurance and life insurance are great ways to protect your family. But, especially if you’re the family’s primary breadwinner, you want to know that your family won’t be financially strapped if something happens to you.
7) Contribute to a Tax-Sheltered Retirement Account
More and more Americans are on their own when it comes to saving for retirement. It’s difficult to depend on Social Security benefits and, even if you have a job that includes retirement benefits, it’s a good idea to be prepared. If you have employer-matching benefits through an employer-sponsored plan like a 401(k) or SIMPLE IRA, and your employer offers matching contributions, take advantage of it. Consider using your refund to invest in tax-free retirement savings, like an IRA or a Roth IRA.
Ready to maximize your refund? Let CWF help!
Trying to figure out taxes can be frustrating and tricky, especially with so many tax code changes. However, working families and individuals in Philadelphia, Montgomery County, and Southern New Jersey earning less than $65,000 per year can get free professional help at CWF. An IRS-certified CWF tax preparer will help you eliminate the stress that comes with taxes and make sure you get the tax refund you deserve!.