It’s the most wonderful time of the year – tax refund season! If you’re expecting a refund this year, (the IRS has reported that the average federal refund for 2019 is more than $2,300), chances are you have some big plans. You may even be daydreaming of a vacation or a just-for-fun purchase.
Pause. Before you let your refund burn a hole in your pocket, remember that you’ve been working hard for this money all year and that it’s being returned to you because you paid too much in taxes, not gifted to you. Check out our tips below on how to use your refund wisely – it could go a long way in building and strengthening your financial position.
1. Start an emergency fund.
If you have trouble saving, you’re definitely not alone. In fact, nearly 40 percent of US workers have reported having less than $1,000 in savings to cover an emergency. While you may have big plans for your tax refund, remember that it’s important to first have a financial safety net in place. This is especially important for long-term financial health because having this money set aside can help you avoid taking on high-interest debt in desperate situations.
If you already have an emergency fund, consider contributing to it. A general rule of thumb is to set aside 3 to 6 months' worth of living expenses for an emergency fund in case of job loss, illness or an unexpected bill.
2. Tackle high-interest debt.
It’s nearly impossible to work toward long and short term goals when you have high-interest debt hanging over your head. And if you’re having trouble, actively working to pay it down, your debt is compounding expensive interest every month, making it even more difficult to eliminate. It can be a hard cycle to break but putting a lump sum of cash, like your tax refund, towards these debts is a good first step that can prevent expensive compounding interest later on.
Focus on paying off payday loans, title loans and high-interest credit card loans first. They’re typically guilty of costing you the most in the long run. In addition to freeing up cash, paying down your high-interest debt will also improve your credit score. This may open doors for you to take on new financial goals, such as buying a home.
For more information on how to strategically pay down debt, check out our tips here.
3. Take on a home improvement project.
If you’re a homeowner, you already know that home maintenance and repairs are pricy. Your tax refund may feel like it should be “fun” money, but consider reinvesting it into your home. When done properly, cost effective home improvement projects are a great way to maintain the property, prevent expensive future repairs and increase a home’s resale value.
Consider updating lighting fixtures, changing bathroom and kitchen hardware, painting, replacing old windows or insulating pipes. These projects don’t take much in the way of time or money but can go a long way in transforming your home’s aesthetic and energy efficiency.
4. Make a donation.
Making a donation won’t just help others, it’ll work to your advantage when you file your taxes next year. Many donations may be deducted on your taxes if they are made before the end of the calendar year. In order to ensure that your donations work to your advantage during tax time, donors are encouraged to ensure that the charity is eligible for a tax deduction at IRS.GOV. Keep in mind that donations to churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations even if they are not listed in the tool’s database.
Making a donation is always well intended. However, before writing a check, It’s always recommended that you consult with your financial advisor or tax professional first. Once you do make a donation, be sure to keep a record of it with receipts. This includes the name of the charity, description of the donation and the date of the donation.