5 Smart Ways to Use Your Tax Refund
Tax season can bring a sense of excitement for those who anticipate a refund. While it may be tempting to splurge on a shopping spree or an extravagant vacation, there may be smarter more responsible ways to utilize this windfall. Here are five strategies to consider for making the most of your tax refund:
1. Tackle High-Interest Debt
Do you have debt with an interest rate above 7-8%? “High Interest debt” usually refers to debt that has a rate exceeding current mortgage rates like credit card balances, personal loans, even student loans for some, consider paying down these debts with your refund. High-interest debt can build very fast and become a significant issue over time and detract from other financial goals. Paying down the debt will save you money on interest and get you closer to true freedom.
2. You Could Create an Emergency Fund
Why build an emergency fund? Be prepared for losing a job, surprise medical expenses, big home or car repairs, or a litany of other things life can throw at you. Having an emergency fund in place provides a safety net during tough times and prevents you from relying on credit cards to cover expenses you didn’t foresee. As a rule of thumb, aim to save at least 3-6 months' worth of living expenses in a liquid and easily accessible account, such as a high-yield savings account.
3. You Could Invest in Retirement Accounts
It’s not what you earn, it’s what you keep, that leads to real wealth over time. Pay yourself first and save money on taxes but saving to your retirement account. Let your tax refund be a catalyst for growing your net worth, not a detractor from it (by leaving the refund in a checking out where it’s vulnerable mpulsive spending. A 401(k) through your company, IRA (Individual Retirement Account), or Roth IRA, are all great options to consider. As a rule of thumb, aim to save 15-20% of your income towards retirement.
4. Save for Major Goals or Expenses
Whether it's savings for a down payment on a home, buying a car, or a dream vacation, saving for major goals takes disciplined planning. Prioritize your goals then use your tax refund to make your highest priority goals a reality that much sooner. You can even open a dedicated savings account for each goal and automate contributions to make sure you’re funding the account making consistent progress. It’s so important to break down larger goals into smaller, manageable milestones to help you stay motivated and track your progress over time.
5. Fund Education or Career Development
The best investment is in yourself. Spending the funds on a new designation, training, or certification program can lead to career advancement and a much higher income now and over the course of your life (which will pay for itself many times over). Alternatively, consider saving to a 529 college savings plan for your kids future college. Investing in education improves your lifetime earning potential and opens doors to new opportunities and career growth.
In conclusion, the faster you grow wealth, the closer you get to financial freedom, but that wealth is tied directly to the decisions you make. This refund isn’t “extra money” that’s expendable, use it wisely towards the things that will add the most value to your financial well-being and security.
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Author: Jonathan Grannick, CFP®
San Diego Financial Advisor | Fee-only Fiduciary
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