Another tax season has come and gone, and if you’re receiving a tax refund, you may be wondering what to do with it.
First of all, if your refund seems too large, you might want to check your withholdings. That money could be better spent throughout the year. If you’ve had any major life changes – marriage, divorce, new baby, new job – make sure your W4 reflects that. The same goes if you end up owing money at the end of a tax year. Adjusting your withholdings is the quickest way to fix that.
Save Your Tax Refund
Saving your refund is a smart option for your refund, but some approaches will stretch your money farther than others.
Retirement – Put your refund toward your retirement portfolio. Tax-deferred options like your IRA (Roth or traditional) and 401(K) are great places to start.
Emergency fund – Are you prepared for a broken-down car, last minute home renovation or surprise hospital bill? According to Bankrate.com, more than a quarter of Americans have nothing saved in case of an emergency. Most financial experts recommend banking about 3 to 6 months’ worth of expenses in an emergency fund.
If your fund is lacking, that is an ideal place to put your refund. Having an emergency fund when you need it prevents you from falling into credit card debt or destroying your budget when the time comes. Everyone faces some kind of financial bump in the road eventually, and it pays to be prepared.
Save for the year ahead – Do you have any expenses on the horizon? Maybe you’ve been putting off fixing your roof or replacing your tires, or you know you’ll be traveling for a wedding. Setting aside that money now will ensure you’re prepared when the time comes, and saves you from scrambling at the eleventh hour.
Spend Your Tax Refund
Saving your refund is definitely practical, but sometimes that money is better off being spent.
Pay down debt – If you’ve been carrying a balance on your credit card, paying that off now can save you money in the long run. Credit cards tend to have high interest rates, so it works in your favor to pay it off quickly. Beyond that, look for other debts that have been lingering.
If you have an outstanding medical bill, student loan or car payment that you want to pay off as soon as possible, this is the time to do it.
Spend now, save later – Upgrade something in your life to save time or money. This could be a more efficient air conditioner to save you money on energy bills, a better quality laptop that will save you time in your business, or a course or certification that could lead to a raise. Be aware of strategic purchases that could more valuable down the line.
Whatever you choose to do with your refund, the important thing is to have a plan and spend it intentionally. That will put your money to its best use and help you make improvements where they’re needed most.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.