While the tax preparation season can bring a little additional stress, the feeling of getting your tax refund can certainly make up for it. According to U.S. News & World Report, in 2014, approximately 75 percent of those who filed taxes in the U.S. received an income tax refund.
Once you get that money in your pocket, it's very easy to immediately spend. The problem is that for most people, that money does not go into a savings account.
Even though a nice income tax refund almost feels like free money, you should still be responsible with your refund. Here are five smart ways to invest your refund this year:
1. Pay off your debts
Again, receiving a large tax refund can feel like getting a big chunk of free money when the check comes in the mail or is directly deposited into your checking account. However, you should never act like any tax refund is expendable money.
One of the best ways to spend this money is by paying off your debts. For younger generations, debt is typically the most worrisome financial aspect in their life right now. In a report conducted by the Harris Poll and Million Dollar Round Table, roughly 83 percent of surveyed millennials listed debt as their biggest financial concern.
"Most people have a spending issue that drives their insecurity," said Brian Heckert, vice president of MDRT. "Setting aside a small amount of money can quickly turn into a few hundred dollars that can be seed money for an emergency fund."
2. Pay an additional month on your mortgage
If you own a home, your tax refund could help you significantly in the long run by having the money to pay for an additional month on your mortgage. Simply put, you save money by paying less interest in the long run if you can pay extra off your mortgage principal, Time magazine reported. More likely than not, most homeowners don't get the opportunity that often to get ahead on their mortgage payments.
So, once you receive your tax refund, you can put that money toward paying off your mortgage. While it's not as fun as an additional vacation, you could cut off a few extra years of mortgage payments by investing right now.
"You'll rest easily knowing you put money away for a rainy day."
3. Add to your emergency savings
It's always smart to have a healthy amount of emergency savings. A sudden emergency or unforeseen event could deplete your savings account, which means you will have nothing to lean on if something else arises. Kiplinger suggests trying to build up your emergency savings to limit additional credit card debt and assure the peace of mind that you have money in the bank in case there ever is an emergency situation. You'll rest much more easily knowing you put your money away for a rainy day rather than spending it immediately.
4. Pay off student loan debt
Another major issue with Generation Y and X is student loan debt. According to U.S. News & World Report, student loans should be at the top of the list of debts to pay off because they can severely limit your financial options down the road.
Meisa Bonelli, a Wall Street finance and tax expert, explained student loan debt holds back people from spending money on things they desire such as a new car, house or vacation.
"Get [student loan] debt gone," Bonelli added. "It holds you back from everything else you want to do in life."
5. Put money toward a down payment
If you have the itch to move, you know you'll need a sizable down payment to get the home you truly want. Investing in a down payment can be a great way to build your financial stability when purchasing a new home.
Many first-time homeowners are slapped with unexpected fees on top of the down payment, which can be extremely difficult to pay without a warning. Instead, try to put your tax refund toward the down payment to reduce the stress of collecting that money when it comes time to get the home.
For more information about smart ways to manage your finances, contact Landmark Bank.
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