Ah yes, the annual tradition of gathering receipts and channeling our inner accountant! Tax Season is upon us. For millions of Americans, it is also a time of great anticipation as we await the annual windfall that is our tax refund. Considering that in 2020, the average tax refund was over $2,800 , it is easy to let our minds go to all the fun we can have with our tax refunds.
But before spending all your refund on a new TV or towards a car that could saddle you with monthly payments for years, take a deep breath and think about how you can use that money to help improve your current and future financial health instead.
Option 1: Shoring up your financial foundation
If you’re trying to organize your finances or get back on track, your refund can be one way to supercharge your plan.
- Establish or strengthen your emergency fund. Most experts recommend having 3-6 months of expenses saved in an emergency fund to deal with unexpected expenses or even bigger events like job loss and illness/injury. Having one in place can allow you to stop using credit cards to deal with unexpected bills.
- Pay down high interest debt. If you have credit cards or other high interest debt (north of 6% interest rate), using your refund to pay that down may save you a lot of money in interest. Once you pay off your credit cards, be very careful about how you use them going forward to avoid rebuilding debt.
- Save for your future. Using your refund to save for your future may not seem as fun as spending it now, but it’s a great way to improve your peace of mind.
Option 2: Give your goals a boost
We all have financial goals that we are saving for, and a tax refund is a fantastic way to give those an extra boost! Here are some examples to consider:
- Saving for college; Use your refund to start or grow your education savings.
- Vacation; Set money aside for that next vacation rather than paying off your card after the fact.
- New car fund; Add to your growing down payment — the more you pay upfront, the less interest you may have to pay.
Option 3: A little bit of everything
It is ok to treat yourself with your tax refund but be careful about spending all your refund on indulgences. Instead, think about splitting your refund to take care of past, present and future you!
- Past You. Pay off those lingering debts.
- Present You. Treat yourself! Take 10-20% of your refund to get or do something for yourself.
- Future You. Increase your savings for emergencies or other goals.
Making good choices with your tax refund can go a long way to improving your financial situation — now and in the future. Focusing on your priorities may not get you all the things you want right now, but it will help you get the things you want most in the long run! Happy Tax Refund Season!
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