With the tax filing deadline approaching, it’s not too early to think about how you’ll use a refund this year. If you receive a state and/or federal tax refund, here are five tips to making the most of your refund.
Pay down debt
Sure, it’s not as fun as rewarding yourself with a trip or a shopping spree, but reducing your debt is one of the smartest financial moves you can make. Outstanding loan and credit card balances can hurt your credit score, making it more difficult to get the best rates on new borrowing. If you’re saddled with debt, consider paying off the loan balance with the highest interest rate first. Lastly, reducing debt will curb financial stress.
Save for retirement
If you’re behind on your savings for retirement, a great idea is to put your tax refund into an Individual Retirement Account (IRA) or into a savings account that you will eventually roll into an IRA. You’ll do your future self a huge favor by starting to save for retirement or ramping up your savings rate. Compound interest and investment returns help the money in these accounts grow, so you’ll thank yourself once you retire.
If you’re a homeowner, take care of repairs and upgrades around the house. Be strategic about improvements. Replacing a garage door or installing a new steel entry door cost less than $2,000 each on average, but they provide some of the best returns on the dollar with the market value they add to your home, according to Remodeling Magazine.
Save for emergencies
Because you don’t want to touch your retirement account with emergencies, it’s important to build an emergency savings. Consisting of three to six months of living expenses, the money should be readily accessible. This fund provides for the unexpected in life such as medical expenses, job loss, or immediate home or car repairs. A tax refund probably won’t cover three to six months of living expenses, so continuing adding to your emergency fund to hit your savings goal.
Focus on needs
As tempting as it may be to splurge on a new television, you’ll probably regret using your refund for anything that lacks long-term value. That includes vacations, shopping sprees and decadent nights out on the town.
If you consistently receive substantial refunds but never put them to good use, consider adjusting what’s withheld from your pay. That way, you’ll avoid giving the government too much money and can use it to cover more pressing needs.
Guest author, NerdWallet
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