As we approach tax day 2022, you may be expecting to receive a tax refund. While you may have a temptation to spend your tax return, other options may be more beneficial to your financial situation. Your tax refund is for overpayment of your taxes and reflects your hard work. With that in mind, here are ways to use your tax refund to give your financial situation a boost and make those refund dollars work for you:
- Minimize your debt- If you carry a balance on your credit card over time, use your refund to pay down or pay off your debt. Each month that you pay finance charges is another month you have less to invest for your financial goals. Whether credit card debt, an auto loan, or a home mortgage, use the extra cash to minimize your debt.
- Fund your retirement- Use the tax refund to open or contribute extra to a Roth or Traditional IRA. The power of investing more now can provide significant growth of your investment over time, helping ensure you have a retirement nest egg when you need it in retirement.
- Set aside a cash reserve- Having a 'rainy day fund' can help you stick to your spending plan and keep you out of debt when unexpected emergencies occur. A fully funded cash reserve is three to six months of living expenses but may be more, depending on your unique situation. Use your refund wisely as a way to avoid financial emergencies.
- Invest in the stock market- Historically, investing in the stock market produces a greater return than a savings account or a CD. Since stock market performance fluctuates, investing in it comes with risk. Therefore, if you anticipate needing your investment in a few months, evaluate if the stock market is an option for your unique situation. Your financial professional can help you determine a strategy based on your goals, risk tolerance, and the timeline for when you need the money.
- Kick your housing costs- Housing is a significant fixed expense that can reduce by buying versus renting (depending on your geographic location) or renting a more affordable place. If you intend to buy in the future, save your tax return for your mortgage loan's down payment. Use the tax refund as a deposit on a more affordable place to call home if you rent.
- Save for a college education- If you have children or grandchildren, deposit your tax refund into a college savings fund for their benefit. If investing in a 529 college savings plan, you may receive a state tax deduction depending on your state of residence and income. With the rising cost of education increasing each year, you'll be helping them start their career with less debt.
- Purchase life insurance- Life insurance shouldn't be overlooked, especially for those with young families or debt. You can use your tax refund to pay your first year's premiums and stretch further if you purchase a term insurance policy. A term insurance policy provides you with a set amount of coverage for a specified term. Your financial professional can help determine an appropriate amount of coverage for your situation.
- Start a business- If you're thinking of starting a side-gig or planning to leave your full-time employment, your tax refund can be the seed money to help you get started. Use your refund wisely to pay off debt or purchase needed equipment before you get started.
- Reduce your transportation costs- Transportation can be a considerable expense since many households own more than one vehicle. If you have an auto loan, use your refund to pay it down or off. Another use for your tax refund is to consider buying a used car with cash or replacing the one that requires frequent repairs.
- Invest in your human capital- Stay up to date on your job skills or further your education by taking classes paid for by your tax refund. You are your biggest asset in producing income and investing in yourself.
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