It can be tempting to splurge with your tax refund, but making spur-of-the-moment choices that may make you happy now, could hurt you in the future. Getting a tax refund is a great opportunity to better your financial health and meet your financial goals. Here's a few smart things you can do with your tax refund to help set you up for financial success.
1. Start or contribute to an emergency fund
If you don't currently have money tucked away to help pay for unexpected expenses or your emergency savings fund is looking a bit lackluster, using your refund to start or increase an emergency savings fund could leave you breathing easier in the event of:
- a job loss
- medical emergency
- major home or auto repairs
- and more
It's recommended that your emergency fund has at least 3, 6, or 9 months worth of take-home pay. The IRS allows you to divvy your refund in up to three accounts via direct deposit so it's the perfect opportunity to stash some cash in your emergency savings fund.
2. Fund your retirement
Having funds stored away for a rainy day is part of a healthy financial regimen. In addition to saving for unexpected expenses, you should also be planning for retirement. Consider placing your tax refund in an IRA account. By saving for retirement now, your future self will be sure to thank you for the foresight in preparing for your future expenses when you're no longer on the job.
3. Prepay your home or auto loan
Making extra payments on your home or auto loan can help you to save money over the long term. Because so much of your payment on a loan goes to pay off interest, reducing the principal on your mortgage or auto loan can potentially shorten the length of your loan and save on payments towards interest.
4. Save for college
If you have children or grandchildren, you'd be doing them a big favor by tucking away your refund into a savings that they can use towards tuition, books, or other expenses that come with higher learning. Additionally, the earlier you start their college savings, the more they'll benefit from compounding interest.
5. Pay down debt
Use your tax refund to help tackle your debt. Consider focusing on paying down a higher-interest debt or using one of these other debt repayment strategies, to help you pay down your debt more efficiently. Use internet banking or bill pay on your computer or mobile device to schedule your payment(s).
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