A tax refund is the amount the government gives back to taxpayers who have paid more than they actually owe. This often happens when organizations hold onto excess income tax from employee paychecks. The refund received may often be a huge sum, so it is important to use it wisely. Taxpayers can do quite a few things with this money to have a financially secure future.
Pay Off Credit Card Debt
Credit cards are great financial tools when used wisely. However, their unrestrained use can land individuals in financial trouble. This is because high credit card interest rates exceeding the 21% mark can add up to much debt. So, when individuals receive an additional tax refund, they should consider using it to pay off their credit card debt. Starting with smaller dues to build momentum and gradually addressing larger debts is a solid way to start. This technique, called the snowball method, is a great way to ease finances in the long run.
Set Aside Emergency Fund
Emergencies can occur unexpectedly, so it is good to be prudent and have funds set aside. One way to use these tax refunds, especially when individuals have a steady income flow, is to set up an emergency fund. Setting aside at least three to six months’ worth of expenses in an emergency fund account for unexpected expenses and rainy days is recommended.
Use It Toward Retirement Savings
Putting the tax refund in retirement savings can maximize their benefits. The money can go into investment options, like a traditional or Roth IRA. Such investments will help individuals supplement their income post-retirement. However, exploring other investment options and consulting a financial advisor for useful tips is recommended, as there might be better ways to invest for retirement.
Start a Business
Those who are creative, have entrepreneurial traits, and have extra time can use their tax refund to open a business. For instance, those who enjoy baking, painting, digital marketing, or other pursuits can consider using the money as capital to turn their talents into a side business. Opening a business is recommended once individuals have set aside their emergency funds. So, if the business does not do well or the investment doesn’t pay off, they still have their savings and paycheck to fall back on. However, if everything proceeds as planned, they will have supplemental income to secure their financial future.
Use It for Self Care
Putting in hard work throughout the year certainly merits some form of self-care. Individuals can spend this money on travel, purchasing new gadgets or home appliances, treating themselves to a spa day, or investing in an insurance policy for managed care.
Invest in Home Essentials
Individuals can use the tax refund to make smaller adjustments and renovations to their homes. This can include upgrading to LED lights, installing new bathroom fixtures, or repainting the house. Making these improvements with the tax refund can help individuals save on potential repair costs in the long run. Additionally, making minor adjustments can enhance the value of a home in the future, should they decide to sell it.
Individuals can also consider replacing doors and windows or purchasing a new bed. They can buy or upgrade home appliances, such as washers and dryers, refrigerators, robot vacuum cleaners, and dishwashers, to alleviate their workload at home.
Save for a House
The average tax refund is about $3,000, which is a significant sum in the long run. So, apart from making home improvements, individuals can set aside tax refunds to cover the down payment for a house. It is a great way for maximizing tax return benefits. This money can also help cover the rent or pay a security deposit.
Contribute to a College Fund
Those with children or planning to have any in the future can set aside their tax refunds to pay for a college fund. Starting as early as possible is one of the best times to set up the fund. That said, even if individuals have not begun saving early, they can still allocate the tax refunds toward a college fund before their children enter high school. This way, when their children start university, they can focus on their studies and enjoy their college life without worrying about paying college loans.
One of the most popular college savings funds to consider is the 529 fund. However, it is recommended for individuals to make a decision only after reviewing all available options.
Buy Life Insurance
Most individuals overlook life insurance, but it is an important aspect of setting up finances, especially for those with families. A smart financial move with the refund is to purchase a term life policy to protect loved ones. Investing a few hundred dollars in the policy can help families maintain their standard of living in the event of a mishap.
Support a Charity
Individuals who have a stable income flow and set aside money for a rainy day can consider supporting a charity. That said, it is important for individuals to thoroughly review charities to ensure their contributions go to legitimate organizations that make a positive impact. Additionally, contributions to charities can provide tax deductions during the next tax season.
