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By Stephen Sellner | Citizens Bank Staff
If you’re like most people, you’re looking forward to receiving your tax refund. In 2019, the IRS refunded roughly $319 billion to more than 111 million people for an average refund of $2,860.
There are a number of different ways to use that money — but do you have a plan for how to use it effectively?
Your first reaction might be to take a vacation, go on a shopping spree, or some other way to treat yourself. But remember: You earned this money with every passing paycheck. Your tax refund can be a great opportunity to make some progress on reaching your financial goals.
Here are some tips for how you can make the most of your tax refund.
An emergency savings fund is a critical aspect of planning for your financial future. This type of fund gives you a financial cushion should life take an unexpected turn — a job loss, major car repair, etc. — that requires instant access to larger sums of money.
Consider using some (or all) of your tax refund to build your emergency savings fund — or replenish it, if you recently dipped into it. Ideally, you want to have enough saved in the account to keep you financially afloat for three to six months. Take stock of all of your monthly expenses so you can get a better idea of your savings goal.
Student loan payments can be a frustrating expense, one that can hold people back from reaching other financial goals. Want to get closer to the end of that frustration? You could use your tax refund to make a larger-than-usual payment. That could put a dent in your principal balance and bring you closer to life without student debt.
Some lenders don’t charge a pre-payment penalty for larger-than-normal payments, but other lenders might, so make sure you know your lender’s policy before making your payment. (You could also consider refinancing your student loans to try to cut down on your monthly payments.)
You might be more focused on planning for future financial goals rather than immediate needs. If that’s the case, consider allotting your funds to your retirement account. Using a share of or your entire refund to plan for your retirement could do your future self a big favor. Going this route allows your money to grow, thanks to compound interest — and the contribution might be a big boost to your savings.
A tax refund is a major windfall. With that in mind, investing some or all of your tax refund could either jumpstart your planning for the future or allow you to take that next big step. Yes, investing in the stock market involves the risk of losses. However, if your tax refund is invested over the course of 10 years or so, you’ll have time to overcome any dips in performances while also experiencing any gains during that time.
Your tax refund could make a big splash with your child’s college fund.
It’s never too early to start saving for your child’s education! So whether your son or daughter is still in kindergarten or counting down the days until they start high school, putting your tax refund in a 529 fund or other college savings account could pay off in a big way down the road.
Are you behind on your credit card payments? Is the interest starting to accumulate? Your tax refund could be your golden ticket to paying down your balance. Your refund could either pay off your credit card or make enough of an impact that you’re able to pay off the rest relatively quickly.
A tax refund could provide the cash you need to purchase a new appliance for your house, such as a new refrigerator, dishwasher, washer, or dryer. These types of expenses are always difficult to fit into your budget; however, if you use your tax refund for such a purchase, you might not feel the financial burden as much. Also, if you put the money toward the large expense right away, you might be less inclined to miss the money since you didn’t have it for very long.
You could also use that money as part of a larger home renovation project. Remodeling your home could raise the resale value of the home, so consider the cost of the renovation project and the return on investment you can expect.
Using your tax refund to save for a down payment on a home could be the move for you. With the average tax refund close to $3,000, think about how big of a difference that could make for you and your future! That could move your homebuying timeline up by an entire year!
Speaking of moving, you might have dreams of renting a new apartment at the end of your lease. In some areas of the country, signing on for a new apartment comes with a lot of upfront costs — first and last month’s rent, security deposit, and maybe even a broker’s fee. Putting your tax refund aside to help cover these expenses could lessen the financial burden of finding your new apartment.
Do you have a qualified charitable organization you support or want to start supporting? You could make a contribution with your tax refund. This act can give you the fulfillment of helping your community and assist you in the form of a tax deduction when next year’s tax season comes around.
Maybe you’ve had your eye on a new computer, special vacation, or a new pair of glasses. You could use your refund to reach the goal and get that item you’ve been saving for. Or, if you’re feeling generous, splurge on someone else and wow them with an amazing birthday or holiday gift this year!
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