Did you pay too much in taxes last year? The good news is you will see that money again once you file your tax return, but do you plan on saving or spending it? Rather than viewing the refund as an excuse for a shopping splurge, here are some things you can do with the cash to leave your finances in a better place this year.
Beef up your emergency fund
An emergency fund is your biggest line of defense in terms of preventing unnecessary debt. If you have cash in the bank, a car repair or medical bill won’t require you to use a credit card that you are unable to pay off, resulting in incurred interest that sets you back financially. First and foremost, make sure that you have plenty of cash savings to cover you in case of an emergency.
Get rid of debt
If your emergency fund is in good shape, you can start to turn your attention to other uses. The quickest and easiest way to improve your finances is to pay off debt. Even if you have a lot of debt in comparison to your refund amount, that little bit can start to make a difference by reducing the amount of principal you owe on your loans. For example, suppose you have a $2,000 refund but $20,000 of debt ($13,000 car loan + $5,000 personal loan + $1,500 credit card bill + $500 medical bill). That $2,000 can wipe out both your credit card and medical bills, leaving you with fewer bills each month and a lower total minimum payment on your debt, freeing up some cash each month that can be used for other things (like paying down more debt).
Replace broken things
If you have a leaky fridge, a broken washing machine or an unreliable car, now is a great time to think about replacing them. Malfunctioning appliances can cost a lot of money in repairs and start to add up. You will need to determine if replacing what you own will actually save you money. However, purchasing a new car or appliance requires quite a bit of cash. That’s where money from your tax refund can come in handy. You can purchase your new appliance without incurring debt and save money over the course of the year by reducing your repair costs.
Cash savings and debt reduction should come first but once you feel that you have other parts of your financial life under control, you’ll want to consider investing your money. Compounding interest allows your money to earn money (interest) and then that interest continues to grow your investment each year, adding up in a big way. This is especially important when you are considering saving for something that’s in the future, such as retirement or your child’s education. If you don’t understand investing, do your best to read up on some basics, either online or at your local library, and then meet with a financial advisor (get a recommendation from someone you trust) to help you put into place an investment plan.