As most of us are receiving our tax refunds, or have already received them, many are asking what to do with that chunk of money. Some have already spent it and some already have plans on where to spend it, but for the rest, we put a list of ‘what to do with your tax refund’.
In the last few years the average tax refund has been around $3,000, so that’s not a small amount to let go without a plan, and it could make a difference on our personal finances. So here are 7 things to do with that money.
1. Build or add to an emergency fund. It’s recommended to have at least 3-6 months of expenses just in case, to cover from a small unexpected expense up to needed money to push through if you lose your job.
2. Pay down some debts, especially if high-interest debt, like credit cards. It’s recommended to pay the highest interest rate credit card first or you could also pay the smallest debt amount to completely eliminate it and give you a mental boost as one less debt account to worry about.
3. Open an Individual Retirement Account (IRA) or fund an existing one. Many people, especially young people don’t have access to a 401K or are not eligible for one, but don’t get discouraged. Almost everyone with earned income can still invest for retirement via an IRA and get the money to compound over time.
4. Set aside some for your travel. Set up a travel account and put some of the tax refund to be used for your travel expenses. If you really care about traveling, add to the fund monthly to get to the goal you set and take that dreamed journey…
5. If you have kids, set up a 529 Plan or add to your kids’ education fund. You can get some tax benefits, and the kids may thank you for having less loans than you had.
6. Create a budget to stay on track – pay yourself $100 to do it or pay a professional to help. One of the most important things to do is set up and track your money coming in and going out, use mint.com or a similar software to help with it, even a spreadsheet can help. Here’s our template you can use and make yours: Budget Template
7. If your tax refund is consistently high, just remember that you loaned it at 0% interest to Uncle Sam, so it may not be a very good thing. But for some that have a hard time saving monthly, maybe this could be something that works, just have a plan about that tax refund and use it for your financial goals instead of spending it all. You could also make a plan to fund a long-term goal by getting more on your paycheck while a smaller year-end refund. That could be done by increasing your allowances by updating a form known as W-4 that Human Resources made you fill out when hired. Just don’t spend the extra monthly income, so you can save for the goal as you won’t have much of a refund.
And it’s all gone – the average tax refund is around $3,000 – so not much more to do there, but for many, doing something to achieve a financial goal is much better than spending it on things we don’t really need, to impress people we don’t really like. Pay yourself first, and think about your future goals as much as your current fun.