It’s tax season and for almost 80% of Americans, (source) a refund check may be in the mail. It’s easy to view a tax refund as free or easy money, but remember you worked hard to earn that money. Using your tax refund responsibly now can assist in reaching your financial goals in the future.
Here are 8 suggestions for using your tax refund responsibly:
Top Off Your Emergency Fund
An emergency fund is an important part of any smart budget. If your emergency fund has been depleted recently, think about using your tax refund to top it off. Depending on the circumstances, we typically recommend having an emergency fund that covers three to six months of basic living expenses.
Build Your Investment Portfolio
Consider using your tax refund to add to your investment portfolio. Talk to your Certified Financial Planner® about how to allocate your tax refund dollars amongst your investments.
Fill Up Your Retirement Fund
IRA and Roth IRA contribution limits for 2016 are $5,500 if you’re under age 50 and $6,500 if you’re over age 50. (source) Talk to your Certified Financial Planner® about using a portion of your tax refund to maximize your contributions for the year.
Start or Contribute to a College Fund
If you have children or grandchildren, tax refunds can be a useful way to boost college funds. Review some of our college savings suggestions here and talk to your Certified Financial Planner® about contribution recommendations.
Pay Down Debt
Whether you have credit card debt, a car loan, or even a mortgage, making a sizeable payment with a portion of your tax refund can help make a dent in your outstanding debt. If you are applying your refund to a mortgage, be sure to note it as a payment toward principal.
Make a Donation
Consider using your tax refund to benefit a charity. You may be able to deduct the donation on your 2016 tax return. The good news is you don’t have to decide on a charity right away. Set your refund aside and research a charity that is the most impactful for you.
Start a Vacation Fund
If your current savings are already on track to meet your goals, you may want to use your tax refund as fun money. Set it aside in a separate savings account for your next vacation. By using cash savings, you can avoid expensive interest from credit cards.
Refresh Your Home
Your home is often your largest investment. Investing in the upkeep and remodeling of your home can be beneficial. If you’ve been deferring some maintenance, consider using your refund to get it done now especially if further delay could cause more damage down the road. Additionally, refreshing the paint or finishing up some of those pesky projects with the money you receive from your tax refund can have a big impact on increasing the selling price if you decide to sell in the near future.
Remember, while it is easy to use your tax refund dollars to splurge now, allocating the funds responsibly is more likely to have long term benefits that outweigh your temporary sacrifice.
What are your plans for your tax refund?