When you receive a tax refund, it simply means that you’ve overpaid on your taxes for the previous year and the government is returning your money. But receiving a lump sum all at once can still feel like found money, and you may be tempted to splurge on something you’ve had your eye on, like a new pair of shoes or an expensive gadget, instead of putting that money toward a smart financial move.
While there’s nothing wrong with treating yourself, you might be able to make that refund help you achieve more useful financial goals. Here are four smart financial moves to make with a tax refund.
1. Make a Responsible Purchase
Is your dishwasher starting to act up? Does your car need a new set of tires? Do you have kids in daycare? Consider using your tax refund to pay for a service or purchase you already need but would have otherwise used up cash in your bank account. You’ll be relieving the pressure you’d feel later had you made the purchase with your normal income.
2. Pay Off Debt
Whenever you can, it’s a good idea to put extra money toward your debt. Whether it’s a mortgage, credit card balance, student loan, car loan or any other type of debt, paying above the monthly minimum payment reduces the balance of the loan and reduce the amount of money you’ll get charged in interest. Consider using your tax refund to take a bigger bite out of your debt.
3. Increase Your Emergency Fund
An emergency savings fund is important to protect you from financial disaster whenever the unexpected arises, such as a job loss, car breakdown, broken appliance or medical expense. The commonly repeated recommendation is to save three to six months’ worth of expenses, but if that seems too impossible, it still helps to have something in the bank for emergencies.
If your emergency savings fund isn’t where you want it to be (or if you don’t have one at all), you can use your tax refund to bulk up your savings and guard against future financial emergencies.
Are you using an IRA to save for retirement? Are you using a 529 college plan to save for your child’s college education? Do you invest in the stock market? If not, do you want to? Parking your tax refund in the average bank account won’t even earn you enough interest to keep up with inflation. Put it to work for you by investing, which gives you the chance to earn a better ROI and even receive tax benefits in some cases.