How Are You Spending Your Tax Refund?
Have you received your refund yet? What are you planning to do with it? Are you going to pay bills? Take a vacation? Save it? If you’re not sure what to do with it, here are some smart ideas for what to do with your tax refund.
Create an emergency fund
According to a recent Bankrate survey, about 3 out of 10 Americans do not have an emergency savings fund. These funds come in handy when you have home, car, medical and other unexpected expenses for which you have not budgeted. Financial experts recommend saving up to six months’ worth of your regular monthly bills. By doing so, you will have a safety net if you lose your job. For the last few years, my wife and I treated our refund as “found money” and put it in a savings account. This came in handy when we needed to replace an A/C unit.
Pay off debt
Many Americans are swimming in debt. If you’re struggling with this, consider using some or all of your tax refund to pay off high-interest credit card debt. Once you have cleared it, you can focus on your lower interest debt.
If you are behind in your loan and credit card payments, be aware that collection companies ramp up their efforts this time of the year. They know that many people will be receiving refunds. Prioritize your debts if your tax refund won’t be enough to completely catch up on your delinquent payments. Your house, car, and tax debt payments should take priority. Once we determined that our emergency fund was sufficient, we began applying extra to our debt.
Save for retirement
It’s never too early to start planning for retirement. If your workplace offers a qualified retirement plan and allows outside contributions, consider putting some or all of your refund in it. If your employer matches your contribution, you’ll double your tax refund money. You may want to open a traditional or Roth IRA if you don’t have a workplace retirement plan. Consult with a financial planner to determine the best retirement vehicle for you.
Save for your children’s college
Consider opening a 529 college savings plan. Although your plan contributions aren’t deducted from income for tax purposes, you won’t pay taxes on the distributions when you withdraw the money to pay for college expenses.
Make estimated tax payments
If no taxes are withheld from your income, consider allocating part of your tax refund toward your estimated tax payments. This will help you avoid paying taxes when you file your taxes in 2017.
No matter what you decide to do with your tax refund, sit down and think about your financial goals. Then decide how your tax refund fits into your plan. If you can, treat your refund as “found money” that you can apply to any of the items above. It’s served me well for many years.
What are your plans for your refund?
