Are you expecting a tax refund? If so, don’t treat your tax refund as ‘bonus’ cash. Rather look at it as simply a return of taxes paid beyond your actual obligation. This will help you think about using this money purposefully. Here are some ideas to try:
- Start or increase your emergency fund: By stashing away your refund into rainy day fund, you’ll build both a financial safety net and peace of mind.
- Eliminate or pay down high-interest debt: Once you have established an emergency fund, paying off any high-interest debt such as credit card balances, payday loans and debt consolidation loans is one of the best things you can do to improve your financial situation.
- Consider refinancing your mortgage: With relatively low mortgage rates available, you may want to consider refinancing your mortgage to lower your monthly payment and save money. Your refund can provide the funds to pay closing costs and other refinance fees.
- Contribute to tax-sheltered accounts: Using your tax refund to top-up (or start) a Roth IRA or 529 college savings plan offers you a double bonus. Not only will you be compounding dollars and interest for your future retirement or college tuition needs, but you’ll be creating a tax deduction as well.
- Improve the lives of others: If you have your own financial bases covered, then making a charitable donation is another good use of your return. The less fortunate will benefit from your generosity while offering you a tax deduction.
- Reinvest in yourself or your business: Is there something you would like to improve in your business? Or would you like to take a class? If you have funds leftover after taking care of savings and debts, these are a few more smart choices to invest in.
While it is tempting to use your tax return as a windfall, it is important to remember that you earned it. Also, if you are receiving a sizable refund, consider adjusting your tax withholding amount, so you have more of your income to use to cover expenses throughout the year.
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