Chris O'Shea
So you’re getting a tax refund this year. Congrats! Now, go spend it all! We’re kidding, of course. Getting a windfall of cash is a great opportunity to make a savvy money decision. Here are some smart ways to deal with a tax refund.
1.Start or Build an Emergency Fund. If you don’t have an emergency fund, now is the time to start one. A tax refund can also be used to pad an existing emergency savings account. Ideally, you want to have saved at least six months of essential expenses.
2. Pay Down Debt. A recent report found that the average American household has an average of $7,951 in credit card debt. Use your refund to pay down any high-interest-rate debts you have, from credit cards to student loans. Start with the highest interest rate debt and work your way down.
3. Add to Retirement Funds. Use your cash windfall to fund your future. Send the money to your IRA, bump up your 401(k) contribution, or kick the money to whatever retirement savings vehicle you’re using.
4. Create or Add to a 529. If you have kids or plan to have kids, a 529 Plan is a great way to save for higher education costs.
5. Invest. You might be tempted to stash your refund in a savings account, but the stock market almost always offers a better return over the long term. Use your refund to invest wisely.
6. Don’t Immediately Spend It. Whatever you do, try to avoid immediately spending your tax refund. Instead, give it some thought and try to do what makes the most financial sense for you. Sure, if you need a new phone or something, go ahead and spend it on that. But notice we said “need.” Use your refund wisely, because it only happens once per year (and sometimes not at all).
