If you’re like most people, you’re looking forward to receiving your tax refund. In 2016, the IRS refunded roughly $317.6 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 any other way to treat yourself. But remember that you earned this money with every passing paycheck, and your tax refund can be a great opportunity to make some progress on reaching your financial goals.
Here are some tips for how you could 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 — you lose your job, your car needs a major 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 therefore bring you closer to life without student debt. Some lenders, like Citizens Bank, do not 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, whether it’s a 401(k), Individual Retirement Account (IRA), or other 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.
If your retirement account is in good order, you could look at opening a certificate of deposit (CD) or money market to help plan ahead for future goals. If you feel comfortable not having access to the money for a set period of time (typically more than a year) and want to take advantage of higher annual percentage yields, a CD might be right for you. Money markets, on the other hand, give you more access to the funds but have a lower annual percentage yield. Evaluate your goals and the accounts at your disposal to see if this is the right decision for you.
Are you behind on your credit card payments? Is the interest starting to accumulate? Your tax refund could be your golden ticket to catching up on those payments. Your refund could either pay off your credit card or make enough of an impact that allows you to pay off the rest quickly.
A tax refund can provide the funds you need to help 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 towards 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.
Do you have a qualified charitable organization you support or want to start supporting? You could consider making a contribution with your tax refund. This act can give you the fulfillment of helping your community and assist you when next year’s tax season comes around in the form of a tax deduction.
You can prioritize any of these action plans depending on your specific needs. Review your financial situation to figure out the best decision for you, whether it’s putting your entire tax refund toward one goal or splitting it up between multiple goals.
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Disclaimer: Views expressed may not necessarily reflect those of Citizens Bank. The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.