7 Smart Ways To Use Your 2020 Tax Refund
If you’ve finished filing your taxes and found that you’ll be getting a refund, these smart ideas will help you use your tax refund wisely. Whether it’s a little or lot, using your tax refund for any of these things will likely be a smart move in the long run.
1. Pad Your Emergency Fund
An emergency fund is a little like those cans of soup in your pantry cupboard – it feels useless until something happens and you really need it. Your emergency fund’s job is to keep you going financially if the worst happens, such as a job loss or big car repair bill. Having three to six months of living expenses saved will help you avoid racking up debt on a credit card or loan during a tough time. Your tax refund check is a great way to start an emergency fund if you don’t have one, or add a little extra to it if you’ve already started saving.
2. Pay Down High-Interest Debt
Did you know that not all debt is equal? High-interest debts, especially credit cards, store charge cards, and personal loans cost you more in the long run than so-called “good” debt with a reasonable interest rate like a home loan or student loan. Putting your tax refund money toward a high-interest debt is netting you interest savings and shaving months (or maybe years) off your payback period. Start with your highest-interest debt to maximize your savings, or try completely paying off a balance to eliminate a payment and gain some breathing room in your monthly budget.
3. Contribute To Your Retirement Savings
Saving for retirement is usually associated with making small contributions to an Individual Retirement Account or 401(k) throughout the year. But you can make lump-sum contributions to your IRA (up to the IRS contribution limits, of course) whenever you want. Depending on how long you have before retirement, an IRA could be the best place to put your tax refund. Put your money in and wait for the magic of compound interest to work!
4. Tackle Big-Ticket Purchases
Spending your tax refund sounds like bad advice, but if it helps you avoid taking on new debt or adding to your credit card balance it actually makes perfect sense. Whether it’s replacing aging appliances, repairing a leaky roof, or putting more money down on a vehicle purchase, using your tax refund money proactively can help you break the cycle of accumulating debt and avoid interest charges. You’ll also be able to take the time to make an informed buying decision instead of enduring a stressful emergency shopping trip for a new stove, for example.
5. Invest In Yourself
This tip is often overlooked, but using your tax refund to fund your personal or professional development can pay big dividends in the long term. Use your money to continue your education or learn a new job skill with online or local classes. You could also consider budgeting for membership in a professional organization or attending a work-related conference. If you’re able to secure a better job from your new knowledge or professional network, your tax refund will have paid off big time.
6. Consider A Home Refinance
With mortgage rates hovering near historic lows in spring 2020, now is a great time to consider a home refinance. Your tax refund could be the perfect source of funds to cover your refinancing costs and make refinancing even more worth it. If you have an especially large refund, you could even consider a cash-in refinance, where you make a large payment at the time of refinancing to lower your overall interest costs and reduce your monthly payment. It’s a win-win and a great way to put your returned tax dollars to work.
7. Open Specific Savings Accounts Or Certificates
Lastly, don’t forget about the benefits of saving for a specific goal with separate accounts. Having money set aside in savings accounts for specific goals like vacations, holiday shopping, or your next vehicle is similar to the old-school method of keeping your cash in separate envelopes. In a savings account or certificate, you’ll have the added advantage of earning interest, and you’re less likely to spend the money from a savings account compared to cash in an envelope. There’s also an immense satisfaction that comes from putting your tax refund into your “Florida vacation” savings account. Maybe you’ll be ready for spring break next year!
Related: Tips To Keep Spring Break Affordable
As you can see, there are lots of smart ways to use your tax refund. From saving on interest today to saving for the goals of tomorrow, your tax refund can do much more than you might think. You worked hard for the money that you’ll get back in a tax refund. It’s time to make that money work for you!