Four wise ways to spend or save your tax refund
You made it through the tax filing process, paid your Federal Taxes and sooner rather than later, your checking account could be graced with a visit from Uncle Sam. If the Internal Revenue Service leaves you with a good chunk of change, you might consider taking a few days to digest some smart ways to save or spend that money, rather than let it go as fast as it came.
“It may be tempting to go out and buy anything and everything you want that’s on your wish list, but before you cash out your return, think about your current and future financial situations,” said Joe Buhrmann, manager of financial security at COUNTRY Financial. “Take a good honest hard look at where you stand. Do you have any outstanding debts? What about any out of the norm bills coming due in the foreseeable future? Stretch your mind to think of any payments that are en route to your mailbox. Then save the money to put towards these expenses.”
Additionally consider these four wise ways to spend or save your tax return:
1. Add to your emergency fund.
This isn’t the first time you’ve heard about the importance of having an emergency fund, but that’s because these rainy day funds are the first step in building your financial future. You never want to be stuck in a position where you lose your job and don’t have the means to make ends meet. Unless you have three to six months of living expenses set aside to cover your essentials (e.g. food, clothing, shelter) you might want to put a hold on excess spending.
2. Consider opening or adding to an Individual Retirement Account (IRA).
If you’re already enrolled in an employee-sponsored retirement plan, such as a 401(k) – a Roth IRA can offer a measure of tax-diversification to your overall portfolio. With a Roth IRA, you forgo an upfront tax-deduction, but funds grow tax-deferred and withdrawals are tax-free after five years and age 59 ½ (unlike a 401(k) plan where your withdrawals are 100 percent taxable).
3. Invest in your home.
If you own a home, it’s likely your biggest asset. With extra cash on hand, it could be a good time to take a look and see what can be repaired or updated. Research what renovations will get you the biggest bang for your buck, and what your return on investment will be.
4. Pay down debt.
Ask yourself the following questions: Can you pay off the remainder of an auto loan? What about bulk up your payment on a credit card, personal loan or mortgage? Even if you can’t pay something off entirely, the more money you can apply to it, the more you will likely save on interest in the long run. Calculate how much money you are spending on annual interest now versus how much you could be spending if you put your tax refund into your principal loan amount. Would the added payment save you hundreds or even thousands of dollars in the long run?
It can be hard to release the reins on your refund and put it towards something that will benefit your financial
future rather than satisfy immediate gratification. However, your Federal and State Tax Returns are great reasons to think about your financial situation and work on improving it – rather than aiding your financial woes through excess spending.