Some people dread tax season and with good reason. They may owe rather than get taxes back at the end of the year based on their income. For roughly 73% of filers, though, the opposite is true. They receive an average of $2,725 in refunds. This is a good lump sum of money, and how people put that money to use can dictate the financial outcome of the rest of the year. So, what will you do with your tax refund this year?
Here are a few smart uses to consider.
- Pay Down on Debt
Virtually every financial guru recommends using a tax refund to help pay down debt. If you have various types of debt to pay off, you may wonder which one is best to tackle first. A good rule of thumb is to pay high-interest debts first. This includes not just credit cards but also payday loans and personal loans. If you have any debts in delinquency, paying these off could also be to your benefit.
If your tax refund doesn’t cover the entire balance, NerdWallet recommends transferring the remaining debt to a low-interest account. If you have a good credit score, you may even become eligible for debt consolidation with temporary zero interest rates.
- Build Emergency Savings
If you already have your debt under control, then work on building a financial emergency cushion. Some people become so focused on paying off student loans and credit cards that when emergency strikes, they have no choice but to rely on credit cards and other forms of debt again. Building up an emergency fund helps to prevent this from happening.
Most finance gurus recommend having at least enough to cover six months of expenses. However, keeping even a thousand dollars in emergency funds is already more than 41% of Americans. Use your tax refund to start small and keep pushing forward.
- Invest Wisely
There are many scams in the money market masquerading as investments. Beware of these. Choose wisely when investing your money or you may lose every penny and then some. Here are some smart ways to invest your refund:
- Invest in stock, bonds, mutual funds, gold, and other trusted financial products.
- Invest in small solar upgrades for your home that will pay you back in reduced utility bills.
- Invest in minor upgrades and repairs to your home, especially if you plan to sell soon.
- Use the tax refund to purchase a certificate of deposit or open a high-interest savings account.
- Use the refund as a down payment for an investment property.
- Plan for Retirement
Financial experts advise people to set aside at least 1 million for retirement. In spite of this, 15% of Americans don’t have a single penny saved toward that figure. It is never too early to start planning for retirement. Relying on a mix of strategies offers the best chance of reducing risk. For instance, some people focus on paying off debt, buying annuities and investing in stocks.
There are also more traditional routes to consider. If you work full time, take advantage of any 401(k) plans offered by your employer. If you work for yourself, an IRA may be better for you. Some people also set tax-free dollars aside for future medical bills using an HSA.
- Take a Vacation
Not everyone is playing catch up with their financial goals this year. If you have already covered your debts, saved money, invested wisely and planned for retirement, it may be time to take a well-deserved break to prevent burnout. Instead of swiping your credit card to pay for your next trip, use a portion of your tax refund. Here are some ways to keep costs low:
- Drive instead of fly to your destination.
- Take public transportation instead of renting a car when you arrive.
- Compare Airbnb and hostel prices to that of a hotel and choose accordingly.
- Travel during the destination’s off-season when prices are lower.
- Check Groupon and other discount websites for cheap travel packages.
If you have high debt, it can hold you back from achieving the rest of your financial goals, such as starting a business or owning a home. This is why paying down debt is one of the first things people do before moving forward.
Financial Rescue provides both tax relief and private debt relief services to help you get back on your feet. Before you spend that refund, contact us to get your debt recovery process started.