Smart Ways to Use Your Tax Refund: Boost Savings, Pay off Debt, and Strengthen Your Finances

Smart Ways to Use Your Tax Refund: Boost Savings, Pay off Debt, and Strengthen Your Finances

by | Accounting News, Financial goals, News, Newsletter

What you choose to do with your tax refund can significantly impact your long-term financial health. Instead of splurging, consider using this extra cash to strengthen your finances. Smart strategies, such as building an emergency fund, paying off high-interest debt, investing, and addressing maintenance costs, can set you up for greater financial stability in the future.

Boost Your Emergency Fund

An emergency fund should house at least three to six months’ worth of living expenses in a liquid savings account. If you have yet to create an emergency fund, consider using your tax refund to establish a solid foundation. If you already have an emergency fund but you’re short of the recommended goal, your refund can provide the funds to top it off.

In the case of unexpected expenses, such as medical bills, car repairs, or job loss, an emergency fund provides a financial cushion to help avoid sinking into debt. Having this safety net can prevent you from relying on credit cards or loans, keeping you financially secure even when life throws curveballs.

Pay Down High-Interest Debt

High-interest debt, such as credit card balances, can quickly spiral out of control if left unchecked. If you have credit card debt or personal loans with high interest rates, using your tax refund to pay down your debt will lower the amount of interest you’ll pay in the long run, which saves money over time and improves your financial situation.

There are two common methods for paying off debt: the avalanche method and the snowball method. With the avalanche method, you prioritize the highest-interest debts first, potentially saving a significant amount of money in interest in the long run. The snowball method, where you pay off the smallest balance first, helps to build momentum and hit quick wins. Whichever method you choose, using your tax refund to eliminate or reduce debt is one of the smartest financial moves to make.

Invest the Extra Cash

Investing your tax refund can help grow your wealth over time. You could contribute to a retirement account such as an IRA or 401(k), which not only helps secure your future but can also provide tax advantages depending on the type of account.

If you’re looking to build wealth more actively, consider opening a brokerage account to invest in stocks, bonds, or mutual funds. If you’re unsure where to begin, low-cost index funds or ETFs can offer a balanced, diversified option for investing. Be sure to analyze your risk tolerance and investment goals before making any decisions.

Spend Your Refund to Get Tax Benefits

Another smart way to use your tax refund is by spending it in ways that could generate future tax benefits. For example, contributing to a tax-deferred retirement account like an IRA or 401(k) not only boosts your long-term savings but can also reduce your taxable income for the current year, potentially lowering your tax burden. The key is to focus on moves that align with your long-term financial and tax planning strategies, ensuring that the money works for you now and in the future.

Address Maintenance Costs (Home or Car Repairs)

Cars and homes often generate unexpected maintenance costs, which can put a dent in your finances if not planned for. Whether it’s fixing a leaking roof or replacing worn-out tires, using your tax refund to cover these expenses can prevent financial stress down the road.

Addressing these maintenance costs will help you avoid larger, more expensive problems in the future, and you’ll have peace of mind knowing that your home and car are in good working order.

Your tax refund is more than just a chance to splurge. It’s an opportunity to strengthen your financial foundation and set yourself up for future success.

Smart Moves to Make with Your Tax Refund

Smart Moves to Make with Your Tax Refund

by | Accounting News, CPA, IRS, News, Resources, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual

Whether you’re working with a robust tax refund, a work bonus, or an inheritance of some kind, here’s a list of positive moves to make with that windfall.

Evaluate Your Debt

There’s “bad” debt and “good” debt. Good debt is an investment that will grow in value or generate long-term income, such as student loans or home equity loans. Bad debt is anything that quickly loses value, doesn’t generate income, and/or has a high interest rate, such as credit cards and cash advance loans. Whenever you come into extra funds, it’s recommended to pay down or pay off bad debt as a top priority.

Consider Your Emergency Fund

Your rainy-day fund should be stocked with at least three months’ worth of living expenses. If yours isn’t there yet, think about boosting it with your refund. If you are a business owner or your income fluctuates, consider shooting for six months’ worth of living expenses.

Fund Your 401(k)

This is a good time to open or boost contributions to your 401(k) or individual retirement account. The 401(k) contribution limit for 2020 is $19,500 for those under age 50, and taxpayers over age 50 are allowed an additional “catch-up” contribution of $6,500.

Open a Roth IRA

If you’re married filing jointly and have a combined adjusted growth income of less than $196,000, you can contribute up to $6,000 to a Roth IRA. The adjusted growth income cap for single filers is $124,000. This is meant to be a long-term money management move, but if you need to withdraw sooner, you can do so tax-free and penalty-fee, though you may owe taxes and penalties on any earnings (not regular contributions) you withdraw.

Invest in Stocks

Assuming you’ve paid off debt, built up your emergency savings fund to three to six months’ worth of living expenses, and boosted your retirement fund, you could think about consulting a financial professional to build a stock portfolio that aligns with your financial goals and personal risk tolerance. Or, if you’re stock market savvy, you can open a brokerage account on your own and start investing in a stock you believe has the potential for growth.

Additional money moves you could make with your refund (again, assuming debt, emergency savings, and retirement funds are taken care of) include making home improvements; opening up a savings account for something big, like saving for a down payment on a house; or donating to charity.