Tax season is right around the corner, and while some of us here have eagerly gotten the task over with, others will wait until the last minute to wrap up their taxes. While I’ve always been a tax procrastinator, this year I’m knocking out my taxes earlier than usual. Why? I’m really looking forward to getting my tax refund. Not so I can go on a shopping spree and buy some new designer jeans, although I’d love to. Not so I can buy a bigger flat screen TV, even though my husband would jump for joy. And not so I can go on a Caribbean cruise with my husband, although, boy, we could really use one. I’m excited about putting the money we get back right smack on our credit card debt.
This is a foreign concept to some of my friends and co-workers. Many of them are already chatting around the water cooler or on Facebook about how they’re going to spend their tax refund on a trip to Vegas or to go out for a lobster dinner or two. One man I know from church who has a wife and five kids (therefore lots of exemptions) is using his tax refund to take his whole family to Disney World.
The last one really surprised me because I also happen to know this man has been fighting for some time to get out from underneath a mountain of personal debt. If he’d only applied that large sum to his debt, he’d be so much better off financially, I thought to myself. I know better not to judge this man. After all, if I had five kids I’d probably prioritize the vacation too! But it did get me thinking of all the ways you can get ahead by using your tax refund wisely.
Applying your tax refund to your credit card debt is only one way of utilizing the money you get back in a way that puts you ahead financially. Here are some others:
1.) Kicking off an emergency fund.
You can use all or part of your tax refund to start a savings account for emergencies. This is something many of us know is a good idea, but few of us get around to putting into practice. A rainy day fund such as this comes in handy when we have an unexpected expense land on our laps, like a health emergency or a car engine going kaput. Once you’ve launched your emergency fund using your tax refund, aim to fill it to contain three to six months’ worth of living expenses.
2.) Starting or adding to a Roth IRA.
Another way to save your tax refund rather than spending it is by using it to start or build up a retirement account. When considering whether or not to do this, tell yourself that if you spend the money, it’s gone forever, but if you put it in an IRA, it will compound over time, meaning you’ll keep it and then some!
3.) Use it as a down payment on a house or a car.
This will really depend on what stage of life you are in, but if you are an apartment-dweller with hopes of owning a home or drive an old clunker with hopes of getting a more reliable car, you can save up your tax refund toward these ends. Remember: the higher your down payment is, the lower your monthly payments and overall cost will be on a home or vehicle.
4.) Fix up your house.
Again, this depends on what stage of life you’re in. If you’re trying to sell your home, but it’s been sitting on the market for a while, you may want to use your tax refund for some minor improvements or renovations. This will make the home more attractive to buyers and more likely to sell at top dollar. This is a financially smart move, particularly if by selling the house you can downsize to a less expensive one and put some of the profit toward retirement, savings, investments or paying down debt.
In conclusion, think long and hard about how you plan to use your tax refund. Do you plan on using your tax refund for short-term gratification or for something with long-term financial benefits?
Lauren Bailey is a freelance writer who particularly enjoys writing about online colleges. Questions and comments can be sent to: blauren99 @gmail.com.
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