There’s about a month left for you to file your taxes on time, unless, of course, you’ve been granted an extension. While some of us will not be so lucky, many of us will be expecting a refund once we file our tax return.
Many people think of their tax refund as “free money” and tend to spend it on luxuries or big ticket items; however, I’m a proponent for utilizing your tax refund to put you in a better financial position. Here’s seven great ideas for how you should spend your tax refund if you’re lucky enough to get one.
1. Contribute to Your IRA
Do you have an individual IRA account, separate from your employer-sponsored retirement account? If not, you should. For more information of the types of retirement accounts, click here for Your Basic Guide to Retirement. Once you have an IRA, use your tax refund to contribute to it. In 2018 you can contribute up to $5,500 to your IRA. This contribution can also be deducted for tax purposes (your contribution and deductions are subject to tax limitations, though).
2. Payoff Debt
It’s a good idea to use your tax refund to pay down any high interest debt you may have, such as credit card debt. The longer you carry a balance on your credit card, the more the interest builds, so it’s a good idea to pay this off as soon as you can. Your tax refund can give you a good head start on paying this debt down.
3. Build an Emergency Fund
An emergency fund is money set aside for unexpected situations that you didn’t have time to save for. Emergency funds are great for things such as unusual car maintenance/repairs, replacing a broken furnace (insert any other expensive piece of equipment for the house here), unplanned medical procedures, etc. Since these situations arise unexpectedly, it’s a good idea to have money set aside ahead of time so you are not strapped for cash or panicking if you need to put out money with very short notice.
4. Invest
Why not make even more money with your tax refund? If you don’t have one already, open a trading account and transfer your entire tax refund to it. You can invest in index funds, mutual funds, bonds, individual stocks or even a mix of everything. One thing to remember, though: always do your research before investing in anything.
5. Contribute to Charity
People often contribute to charities in order to receive a deduction on their tax returns, but you could also use your tax refund to contribute to charity. It’s not always financially feasible to allocate part of your income to charity, especially when you live paycheck to paycheck or constantly feel strapped for cash. However, when you receive a tax refund, this is beyond what you typically budget for monthly expenses and it gives you the ability to spend it on something you might not normally be able to. So, use your tax refund to pay it forward.
6. Lessen the Burden of Big Expense
Are you planning a vacation? Have you been holding off on repairing something in your house? Would you love to do some home renovations? These things can take a long time to save up for using your regular income. Your tax refund can give you a nice boost to get you closer to meeting your savings goal for those purposes, lessening the burden of saving for big ticket items/experiences.
7. Open a 529 Fund
A 529 Fund is a tax-advantageous way to save money for your child’s college education. While not everyone pays for their kids to go to college, I’m sure your child would be more than appreciative to have any funds to help them pay for tuition. Even just contributing your tax refund could go a long way once invested.
There are plenty of ways to spend your tax refund, but these are some of the best financial choices you can make with that money.
