Receiving a tax refund can be a nice financial boost. Technically though, if you’re doing things well, you shouldn’t be getting a tax refund. You can make sure you don’t pay the government too much during the year with the help of a CPA. But for now, if you do find yourself anticipating a gas return, there are some ways that you can maximize the potential of this so-called windfall. A large tax refund can make a big difference in your life if you use it strategically. It could even help support financial well-being in the future. Here are some smart ways to use your tax refund.
Pay Off Debt
If you find yourself with a revolving door of debt, you could use your tax refund to help get you off the hamster wheel. Making the minimum amount due each month won’t get you anywhere for a long time. In the meantime, you’ll be accruing more interest that is sure to keep your creditors happy, and keep you in debt for the foreseeable future. If this describes your situation, then using your tax refund to pay off debt is a smart idea. You’ll save a significant amount of money in interest charges and improve your credit rating. Start by paying off the debts with the highest interest rates first, as this will have the greatest long-term impact on your finances.
Build an Emergency Fund
An emergency fund is a crucial financial safety net, as you probably already know. Many people know they should have some money tucked away, but they find that there isn’t enough money left over at the end of the month to start such a fund. It’s hard to see a positive outcome when you can’t even get started. But if you’re getting a tax refund, this can be a great time to use a portion of it to start building your emergency fund. Seeing that money in your savings account every time you log into your online banking account will help motivate you to add to your savings. It will grow faster than you realize, even without the terrific interest rates that your grandparents enjoyed. And, by having an emergency fund, you'll be better prepared to handle future unexpected expenses or financial setbacks without relying on credit cards or loans.
Invest in Your Retirement
If your employer has a retirement account benefits, consider using all or a portion of your tax refund to contribute to an Individual Retirement Account (IRA) or a 401(k). These accounts offer tax advantages that can help you secure your financial future. If you're eligible for an employer match on your 401(k) contributions, even better. Take full advantage of it by depositing as much of your tax refund as makes sense for your household.
Splurge a Little
There’s no reason that every penny of your tax refund has to go to productive use. If you’ve spent a long time watching your pennies and there’s something nice that you and your family have been wanting, it’s fine to splurge a little. Maybe it’s a bedroom renovation for your daughter who has recently become a teenager, or a fence around the yard that will enable you to adopt a puppy. Life is here to enjoy, and it’s okay to splurge a little once the essentials have been taken care of.
Home Repairs
Speaking of home upgrades, one of the smartest ways you can use your tax refunds is for home repairs that you might have been putting off. Homeowners can spend up to $20,000 a year on home repairs and maintenance, but if you haven’t got that kind of money, many needed home repairs go undone. Your home is probably the biggest investment that you make in a lifetime, and it stands to reason that you should do what’s necessary to protect that investment. If you’ve been putting off a new roof, new windows or other essential repairs, now’s the time.
Start a Business
The adage, it takes money to make money isn’t far off. Anyone with dreams of starting a business knows that it takes some seed money. If you’re thinking of using your tax refund to start a business, you’re on the right track. This is a great way to put that money to good use, because it could make you more money in the future. Just be sure to make a budget so you spend the money wisely, and consult with your CPA so you set the business up in the best way leverage tax advantages.
Work on Self Improvement
Another option to use your tax refund that can pay off in the future is to invest in self improvement. If you have an interest in a certain field where certifications can help you advance, then it makes sense to spend some money on coursework. Consider taking a course or workshop that can enhance your professional abilities or exploring a business idea you've been passionate about. Investing in yourself can open up new opportunities and increase your earning potential.
Invest in Your Health
Health and well-being is always a priority in life. If you’ve been putting off something important that your health insurance won’t pay for, this is a good time to invest in your own health. Unfortunately, the health system often forces people to sacrifice things they really need regarding vision, dental and overall health. Use your tax refund money to pay for anything you need that your health insurance or Medicare isn’t willing to cover. The value in this is incalculable.
By paying off debt, saving for emergencies, investing in a new business, investing in your own education, paying for needed health care or simply adding something to your family’s quality of life, you’ll be using your tax refund well. Just remember, a qualified CPA can help to ensure that you don’t overpay tax throughout the year so that more money goes into your pocket with each paycheck.