After tax season comes your refund and while it may be tempting to spend that money on the latest tech gadget or new shoes, this money can be used as a nest egg towards some of your long term financial goals.
START AN EMERGENCY FUND
It’s recommended that you have at least 6 months’ worth of living expenses saved up just in case of unemployment, unexpected medical expenses, or other emergencies. This fund should be kept in a separate savings account to help you avoid the temptation of accessing it.
PAY OFF DEBT
If you are dealing with credit card debt, student loans, or medical bills, your tax return is a great way to start paying off those. Always start with the highest interest rates debts first and then work your way down. Eliminating those high interest rates early will help save you money in the long run.
CONTRIBUTE TO RETIREMENT
If you are under 50 years old, you can donate a maximum of $18,000 to your 401k each year. If you are over 50, you can donate an additional $6,000 in catch-up contributions. Money you contribute to your 401k is not subject to income tax, so the more you donate each year, the lower your annual tax bill will be.
UPGRADE YOUR HOME
Your home is probably the biggest investment you will make in your lifetime and improvements can help increase the value if you ever decide to sell. If you have a home improvement project you’ve been putting off due to your finances, consider putting your tax refund towards that new bathroom or kitchen you’ve always wanted.
Studies have shown that an experience, such as a vacation or fun activity, provide more long term happiness than material items. So if you aren’t dealing with any major debts and your retirement fund and emergency savings are doing well, consider putting your refund towards something fun for you and your family to do. Just remember to keep it reasonable. A $2,000 refund doesn’t justify a $10,000 vacation.