5 Ways to Make the Most of Your Tax Refund
With Uncle Sam slowly siphoning funds from your paycheck throughout the year, it’s tempting to spend your tax refund the minute it hits your bank account. The big question is, what will you spend it on? Sure, you could splurge at a luxury designer store or hit up the casino, but you could also be more practical. Benefit from smarter financial choices with these 5 ways to make the most of your tax refund:
- Start an Emergency Fund
You suddenly become ill and must go the hospital. Your car engine dies and must be replaced. You get laid off from your job and now have no income. The common denominator in these scenarios is cost. Did you know 40% of Americans can’t cover a $400 emergency expense? Don’t be one of them. Use your tax return to create an emergency fund that can act as a cushion, should some out-of-the-ordinary expense arise. A good rule of the thumb is that you should have at least 3 months of living expenses in your emergency fund.
- Pay Off Debt
If your credit score has seen better days, you’re not alone! The average American has over $5K in credit card debt. Recycle the credit card offers you get in your mailbox each week and use your tax refund to put a dent in your debt. Take a couple hundred dollars and pay off some of those credit card bills. Your credit score is very important. It determines where you live, what car you drive and if you’ll ever get a loan. Reducing your credit utilization will improve your credit score dramatically, so you can live your best life.
- Invest in a Roth IRA
You may already have a traditional 401(k) account through your job. Consider opening a Roth IRA as well. Unlike traditional investment savings accounts, Roth IRAs are funded after taxes. This means you pay taxes on the funds before investing rather than when you withdraw money in retirement. Diversifying your investments will reduce the volatility of your portfolio and protect your retirement nest egg.
- Save for a Down Payment
While there are advantages to renting a home or apartment, (no down payments, no market risk, low maintenance costs), owning property is almost always a smart investment. When you rent, you pay a monthly fee with no equity. If you are considering buying a home in the near future, put your tax return toward a down payment. A traditional 30-year fixed-rate mortgage can require as low as 3% down. However, you’ll want to put down closer to 20% to get the best interest rates.
- Treat Yourself
You’ve been working hard and deserve something special. If there was ever an excuse to treat yourself, this is it! You’ve already made some wise financial choices with your refund, now it’s time for some fun. Book that trip to Europe, grab those new shoes you’ve been eyeing or get the latest smartphone model.
To make the most of your tax refund, think about the long term rather than the short term. There’s nothing better than having the piece of mind that your future is secure.