So, you just filed your taxes and you’re getting a refund! Now it’s time to carefully consider what you should do with the money. It’s always tempting to buy a new TV, spend it on new clothes or entertainment, but there are better ways to use it. Here are a few wise ways you can consider spending the money and improve the overall health of your financial situation!
1. Start an Emergency Fund
An emergency fund is simply cash set aside for emergencies, and if you haven’t yet started an emergency fund; this is something you should strongly consider! Why should you have an emergency fund? Well, because you never know what’s going to pop up that requires additional funds – like medical or auto repair expenses. Financial expert Dave Ramsey recommends setting aside $1,000 to start if you have other debt you are working to pay off. If you’re out of debt, a good rule of thumb is three to six months of income. It’s easy to open up a simple savings account for an emergency fund; just make sure that wherever you save the money, you have access to get to it quickly when needed.
2. Pay Off Debt
If you already have an emergency fund established and you’re working to pay down debt on a credit card or other balances this is a good option. Consider this: If you are receiving a $5,000 refund you could put it into a savings account and earn some interest on it – maybe 1% or so. If you have a credit card balance of $5,000 that’s charging you 18% interest – it’s a much wiser use of the money to pay off that debt! If your refund isn’t enough to pay off an entire balance, go ahead and reduce the balance as much as you can. Paying more than the minimum payment helps you to pay off the principle faster, which reduces the amount of interest you’ll pay in the long run. It may not seem like a lot of fun in the moment, but the opportunity for more financial freedom in the future sure feels good! An added bonus, it can help improve your credit score.
3. Start a Roth IRA
Contributing to a retirement fund is usually a smart idea. A Roth IRA is something you should consider in addition to your retirement savings (401K). It’s a more flexible plan compared to investments, and they have tax breaks when money is withdrawn in retirement. There are some contribution and income limits that you should research before making the decision. For 2022, you can contribute $6,000 if you are younger than 50 years of age, and for those over 50 you can contribute $7,000. There are income limits that need to be considered to avoid penalties; so be sure to consult with a tax advisor to make sure you avoid any issues or penalties in order to maximize your contributions.
4. Plan for Your child’s Future
The sooner you begin to plan for your child’s education, the better! Did you know that the cost of higher education in Texas has risen 30.4% over the last 10-year period measured (according to 529planning.com)? You can get a start by using your refund to open a Coverdell Education Savings Account. This is a custodial account used for paying qualified education expenses. It can be used for elementary and secondary education expenses, as well as higher education. Now, don’t neglect your own retirement, make sure you’ve made significant investments for your financial future before placing money in educational accounts.
5. Sharpen Your Skills
Use your tax refund to help you sharpen your skills; and potentially take your career to the next level. Put your refund toward tuition for extended learning, attend an industry conference or a networking event; these things will benefit your career and personal growth. An added bonus: you can take advantage of the Lifetime Learning Credit and potentially use the cost of the course to take money off of your taxes next year. Your own earning potential is one of the best assets you have; invest in yourself! Or, take the opportunity to expand your mind and learn something new! Look for opportunities at local universities and colleges; most have online learning options that make it easy.
6. Make an Extra Mortgage Payment
Making an additional mortgage payment can help you reduce the principal amount of the loan and help you save thousands in the long run. When you have a long term note like a mortgage, a lot of the monthly payment goes to pay off the interest first, so this is an opportunity to pay of principle which could help you shorten the overall life of the loan. You may choose to consider refinancing your home to take advantage of a lower interest rate; you could use your refund to pay the closing costs and other fees – just make sure you do the math before refinancing to make sure you’ll.
7. Make Home Improvements
Now’s the time to tackle home improvement projects. If you live in an older home consider upgrading windows and doors, upgrade old appliances to new models that use less energy to help improve the overall efficiency of the home. These improvements can help reduce your electric bills. You could also consider remodeling a bathroom or kitchen to make your home more functional and increase the overall resell value of the home.
8. Consider Life Insurance
If you’re young and confident that you have plenty life ahead; we urge you not to overlook life insurance. Especially if you have a family, a life insurance policy can provide the ability for your family to maintain its current standard of living in the event of an unplanned death. Security and protection for your loved ones – the peace of mind this will bring is worth the relatively low cost of a few hundred dollars.
9. Get a New Bed
Getting 7-8 hours of sleep each night goes a long way in improving your overall health status. If you’re not getting enough sleep, it will be reflected in poor focus, memory issues, inflammation in the body and reduced productivity at work. A quality mattress may be a little on the pricey side, but it’s also more likely to last longer and the added sleep benefits will be priceless. Mattresses should be replaced every 7-10 years; so, toss your old cheap one and make an investment in your health.