It’s that time of year again – tax time! And, while some people dread this season, others rejoice. The taxpayer who rejoices is anticipating the arrival of their tax refund. Who doesn’t like receiving an extra couple hundred or thousand dollars? It’s very tempting to go splurge on new toys, but there are other options that could be more beneficial to your financial future.
If you want to make sure you’re making the best financial decisions you can with your tax refund, develop a plan before you spend your funds. Sit down and determine what areas of your budget or financial plan could use a boost. Also, determine what your financial priorities are and what is most important to you. Let your priorities dictate where your money should go.
Here are a few areas where you may want to consider spending your refund.
Build a Rainy Day Fund
Do you have enough extra cash to pay for a $500 emergency? According to a recent report by Bankrate, 6 out of 10 Americans don’t have enough money to cover a $500 expense. If you’re one of that 60%, this could be the perfect time to pad your emergency fund. After all, you never know when you’re going to need to fix a leaky pipe in your house or a dent in your car.
Not only will having an emergency fund cushion your bank account, it could let you sleep better at night. In a recent Creditcards.com study, 65% of Americans lose sleep over money. So, if you want to rest easier at night, consider adding to your rainy day fund.
Stock Your Retirement Fund
Are you on pace to reach your retirement savings goals? If you’re like most Americans, you may be a little behind. With the average cost of health care being close to $275,000 for a healthy 65-year old couple over the course of the rest of their retirement, this could eat up a large portion of your savings.
The more prepared you are, the better. So, if you feel you’re a little behind, your tax refund could give you a boost to your savings. Consider contributing to your 401(k) or Roth IRA.
Pay Down Debt
Do you have some credit card or student loan debt you’ve been putting off paying down? Tax time may be the perfect opportunity to get a handle on debt. By getting a handle on any debt now, you can avoid making more high-interest payments.
Prepay Your Mortgage
Your mortgage is most likely the most expensive bill you have. Putting extra money toward your mortgage here and there can help you pay it down faster over time. The faster you pay it down, the faster you can say goodbye to your mortgage payments. One thing to be aware of – make sure you don’t have a penalty for paying your mortgage off early.
Invest in Your Home
Is there a home project you’ve been anxious to tackle because of its expense? Using your tax refund to tackle one of your home projects can leave you feeling accomplished. Depending on the project, it could also add to the market value of your home, which can help if or when you sell.
Start Your Down Payment Fund
If one of your dreams is to purchase a home, you could use your tax refund to begin your down payment fund. Even if you plan to put as little as 3% down, your tax refund could help you reach your goal sooner. The more you put down, the less you’ll need to borrow, which could lower your monthly payments.
Consider Life Insurance
If you haven’t already, you may want to consider life insurance, especially if you have any dependents. You can select term life insurance or whole life insurance.
Term insurance can be less expensive and only protects your family for a certain period of time.
Whole life insurance is more expensive but protects your dependents for your entire lifetime. Whole insurance can also help pay your estate taxes and other debt so the responsibility doesn’t fall in your family’s lap.
Turn Your Hobby into a Side Business
Who doesn’t want a little extra cash? Turning your favorite hobby into a business can help you with that. This may require you to register your company with the state or boost your product inventory. If you use your tax refund to start or continue funding your side business, your investment in yourself could pay off!
If you can, set aside a little extra cash to treat yourself. You don’t want to be too rigid and feel restricted when using your refund for practical matters. Set aside a little extra to spend on yourself.
There are hundreds of ways you could spend your tax refund. Make sure you evaluate your finances and select the best place to use your additional funds. By making a plan, you can be sure you’ll put your refund to good use.
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