With tax season wrapping up soon, many of us are looking forward to getting our hands on a refund. Yet while some may have that money earmarked for big expenses like vacations or home renovations, there are many ways that cost-conscious consumers can use their tax refund to improve their personal finances. Here are five suggestions for how to use your refund:
Pay off your debts
It's certainly tempting to put this sudden influx of cash toward something fun, but one of the most practical uses of your refund money is to pay off your debts. Whether that money goes toward mortgages, auto or student loans, paying off debts has a wealth of benefits. Not only can it help lower interest and pay off principals quicker, it can also improve your credit score, opening doors for future lending opportunities - say when you're looking to purchase your first home. Be sure to prioritize the loans with the highest interest rate to see the most positive impact on your personal finances.
Contribute to your retirement
There are a couple ways you can use your tax refund to help shore up your retirement fund. If you have a retirement plan tied to your office, you can use these federal funds to increase your contributions toward that goal, but if you're going it alone, now may be the time to invest in a Roth IRA. These plans are particularly attractive for those individuals nearing their retirement age, as they offer tax breaks on money withdrawn from the account, rather than money placed into it.
Invest in your children's future
What better way to plan for your retirement than by setting up your children for success? By starting or contributing to a college fund for your children, you're giving them an opportunity to expand their education and pursue a more financially rewarding future. A 2014 study from Pew Research found that individuals with a college degree earned an average of $17,500 more in annual income than those with a high school degree alone. Setting up a 529 college savings plan, with which contributions and withdrawals are tax-free (provided the latter is for education expenses), is a great way to get started.
Donate it to charity
If you aren't in any serious need for the sudden windfall, why not donate your tax refund to a charitable organization? In addition to the self-satisfaction that comes with patronizing a cause that is near and dear to your heart, charitable donations can also help you in next year's tax cycle. Donations over a certain amount earned an average of $17,500 more. Just be sure to keep records of all donations made over the coming year.
Feed your rainy day fund
Of course, if you don't have a firm idea of what you want to do with the money, you could always use your tax refund to establish or grow your emergency fund. While many people live paycheck to paycheck, those that can afford to put aside a contingency for those unseen expenses that pop up from time to time should do so. Many financial experts suggest individuals save up 3-6 months' worth of income to cover these unexpected events and using your tax refund to open a savings account could be a good way to start saving.
As with any financial decision, it's important to weigh your options carefully before you invest. Try speaking to a financial investor to see what course of action works best for you and your family.
Insurance and investment products and services are not FDIC insured, not insured by any federal government agency, not a deposit or bank obligation, not financial institution guaranteed, subject to investment risk, including potential principal loss.
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