While filing taxes is nobody’s idea of fun, the hassle and headache of sifting through paperwork and staring at numbers is rewarded for many people. Between tax deductions, extra withholdings, and tax credits, many people receive a refund from the IRS each year. The opportunities for this money are seemingly endless. You could splurge on a vacation, tickets to a major sporting event, new furniture, or something else. Rather than spend the money, however, you could use it to improve your financial situation.
1- Add to Your Savings Account
As a rule of thumb, many financial experts recommend having at least three to six months’ worth of your monthly expenses saved in an emergency savings account. Unfortunately, the majority of people don’t have that much money accessible for emergencies. These are funds that could be used to cover a house repair, an unexpected medical expense, a car insurance deductible after an accident, and other unplanned expenses. In the event of unemployment or the need to take an extended break, your savings account can cover living expenses.
2- Save for Retirement
If you feel comfortable with your savings account balance, consider planning for the future with your tax refund. Retirement accounts are tax-advantaged, and funds can grow substantially over the course of decades due to the rising value of stocks, mutual funds, and ETFs over a long period of time. Dividends are another source of financial growth. If you don’t have a retirement account, consider starting one.
3- Invest in Stocks
If you prefer to have easier access to your funds in the years to come but still want to take advantage of the growth in the stock market, an individual brokerage account is an option. These accounts vary in terms of the assets that you can purchase as well as their fees and user-friendly dashboards. Always do your research before investing your money.
4- Buy CDs and Bonds
While stock prices rise and fall dramatically at times, CDs do not. You must commit your funds for a period of one month up to 10 years for a CD, and your money will grow slowly. Often, the return on a CD is only slightly higher than a high-yield savings account, but this isn’t always the case. Bonds are not a risk-free investment, but some types of bonds are often viewed as a safer option than stocks.
5- Pay Off Debt
If you carry a large balance on a high-interest credit card or loan, you might be paying hundreds of dollars each month in interest charges. Some rates are 25% or higher. Compare this to a typical 7% to 10% return from the stock market. In many cases, it makes financial sense to pay off debt before investing your money. By paying off or paying down your debt, you could lower your monthly payments and have more wiggle room in your budget.
Buying something you want can bring immediate joy and satisfaction, but the feeling is fleeting. When you use your tax refund to improve your financial situation, you can continue enjoying the results of your decision for years or even the rest of your life.