Hopefully you have already filed your tax return and are anticipating at least a modest refund. But, before you get too excited about splurging with your IRS check, stop for a moment and remember that you earned that money! While many people view a tax refund as ‘bonus’ cash—it isn’t. It is simply a return of the funds that you earned and paid as tax beyond what your actual obligation was.
Keeping this in mind, think about using the money you receive from the IRS purposefully. Also, if you did receive a sizable refund, you may want to consider adjusting your tax withholding amount, so you aren’t shorting yourself on your regular income throughout the year.
The following list can help you determine some of the best ways to use your refund—ways that contribute to your long-term financial health:
- Start or increase your emergency fund: By using your refund to stash some money for a rainy day, you’ll be building 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 save money each month with a lower mortgage payment. Your refund can provide the funds from which to pay your closing costs and fees when you refinance.
- 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 to help someone else is an excellent use of your return. It provides something priceless to those who will benefit from your generosity and offers you a tax deduction.
- Reinvest in your business: Is there something you would like to do in your business, but you just never seem to have the money to do it? If you have some funds leftover from your refund after taking care of savings and debts, making an investment in your business can stimulate business growth and enable you to claim a few more tax deductions next year.
While it is tempting to use your tax return as a windfall, it is important to remember that you earned it! Taking steps to secure yourself financially today is an investment that will pay dividends in the future— long after the glow of any spontaneous splurge has faded.
If you have any questions about this information, please contact our office. We are here to help.