Now that the holidays are behind us, and the doldrums of winter are setting in, there is one bright spot on the horizon...you may receive a tax refund. According to the Washington Post, the average refund in 2019 was $3,068.
It may be tempting to use that money to help cure the winter blues, by taking a vacation or going on a major shopping spree. However, there a number of ways to use your tax refund to get yourself in a better financial position.
If you don't have an emergency fund, using a portion or all of your tax refund for funding this account is the perfect way to get started. Ideally, you should have three to six months worth of income in a savings account at all times just in case. You never know when there will be unexpected medical bills or car repairs.
Credit card debt can be a burden, especially considering interest rates are typically higher than most other types of loans. If you can swing it, it would make sense to pay off your credit cards, or make a large payment on the balance.
If you don't have credit card debt, but have other debt such as an auto loan or student loan payment, use a portion of your refund to make extra payments on those loans. Those extra payments will put a dent into the interest you're paying and the principal on the loan.
If you've always wanted to take a vacation or buy a new car, put all or some of you refund into a savings account. This will help you create a large cushion to get started. Then begin making regular contributions to your savings account monthly. This way, you'll get to your goal of doing something fun much faster.
Even on a tight budget, there are improvements we can make to our homes that will inevitably increase their value. You can use your tax refund to paint, re-carpet, replace an inefficient appliance, replace flooring....the opportunities are endless. The investment will payoff when you've increased the value of your home.
When you know you will be receiving a tax refund, really take the time to think about what you would like to do with that money. If financial security and peace of mind is important to you, it may make the most sense to pay down debt or begin saving. If you've gotten yourself to a place where you've got a healthy savings account and little debt, you might consider investing that money or opening an IRA account to supplement your other savings.
You may also decide to invest in yourself, by taking that photography class you've always wanted to take, or register for that college course you've had your eye on. My best advice is to resist the urge to spend your tax refund right away. Really take the time to decide what you'd like most out of your life and make your decision from there.