If you received a tax refund this year, think twice before celebrating. A tax refund is not a year-end gift from the government. If anything it is a reminder to double check your W-4 and revisit your withholdings. Any money that you receive in the form of a refund is money that could have been invested or working for you in some other way. Instead, you loaned it to Uncle Sam at a nice zero percent interest rate. When it comes to tax refunds, coming as close to possible to netting out is the ideal circumstance. In the case that you do receive a refund however, there are several ways that you can use it in order to return the most value to you.
1. Pay Off Debt
Whittling down your pile of debt is often times a task that can seem to provide no value or return. This is especially the case when you can only afford to make small payments and the balance is slowly reduced month after month. Throwing your tax refund at debt is an immediate solution for significantly reducing debt as well as reducing the amount of interest you pay each month.
2. Establish an Emergency Fund
Saving for emergencies or misfortune is never something that is fun to plan for. Regardless, being prepared for such events can often save an individual from financial disaster. Not only that, but knowing that you are financially prepared for most events provides peace of mind which is oftentimes more valuable than anything that money can buy. It is recommended to have at least three months of expenses saved, but some financial gurus would go as far as to say that six months to a year should be on standby for rainy days. Using some form of personal financial software package can make this process much easier. Depending on your personal situation, there are several routes you can take when planning for emergencies.
3. Save for Retirement
With all of life’s other expenses and goals, something as far in the future as retirement can be pushed aside for present day goals. It is already the case that the average American is not saving enough for retirement. Is is never too late to start, nor is it ever too early. Any time extra cash is available it should be socked away into retirement so that it can grow with time. Using an entire refund is a great way to catch up or add to your already established nest egg.
4. Refinance Your Home
There is no better time than now to take advantage of the all time low mortgage rates. If you are thinking of buying a home, or already own one, locking in a low interest rate is a sure fire way to save money in both the short and long term. A refund can be used towards closing costs and fees in order to make the immediate expense of buying or refinancing more bearable.
5. Give to Charity
Sometimes the most return that you can get for a dollar is not mathematically measurable. Giving to a charity of your choice can be more rewarding than any dividend payment could be. The tax advantages that come with donations are an added benefit.
Treating every dollar that comes into your possession with the same amount of consideration in how it can add value to your life is a skill that comes with patience and determination. Putting off a big ticket purchase for a week is usually all it takes to realize that your money can be better spent elsewhere. Regardless of how your refund ends up being used, it is important to use it in a way that will provide you with the most valuable return.
I threw all of mine at student loans. Can’t wait until they are gone!
An emergency fund seems to be a great way to establish some peace of mind, as much as the importance of just having one!
You cannot go wrong with this list. Saving for retirement is especially important in today’s world where 401(K)s need to be maxed out and side investments are also required.