A tax refund is often the largest cash bonus that many people will receive all year. Around tax season, it is common to hear people discussing the various ways they will spend their refunds. Whether it’s on gifts for their children, new furniture, electronics, or a luxurious vacation, they have a plan for their money.
What you don’t typically hear people discussing is how they’re going to save their refunds, but that’s exactly what you should do.
Treat Yourself: Now vs. Later
Receiving a tax refund is commonly looked at as an opportunity to treat yourself, and while there is nothing wrong with doing so, we must understand that treating ourselves doesn’t have to mean indulging in instant or short-term gratification. Instead, consider treating yourself by using those funds in a way that can benefit you in the long term. Before spending your refund frivolously, ask yourself the following questions:
Do I actually need any of the things I plan to purchase?
Am I current on all of my bills?
Do I have any credit cards or loans that are collecting interest?
Do I have any long-term or emergency savings?
Six months from now, will I wish I still had some of my refund money?
Will the plans I currently have for my refund make me any money in the future?
The answers will be helpful in guiding your decision about how to use your refund. For instance, if you are carrying debt, your refund could help pay down or even eliminate it. If your emergency savings isn’t where you want it to be, your tax refund can help you reach that goal.
Save Your Tax Refund
To ensure you make the most of your tax refund, make a plan for how you will use it as soon as you find out how much you’re getting back. Determine how much you need to save for emergencies, long-term goals, retirement, etc. Saying you will save is much easier than actually doing it. Therefore, commit to your savings goals by having a portion of your tax refund automatically deposited into your savings account.
Did you know that the IRS allows you to split your refund among up to three different accounts? For example, you could have some of your refund deposited into your emergency fund, some deposited into your car savings account, and another portion deposited into your checking that will go toward extra debt payments.
Maybe you don’t have multiple savings accounts already set up, but you know that you want to use your refund to save for several goals. If you already have a savings account for emergencies and you want to save for a house down payment, for example, open up a second savings account specifically for that goal. Consider doing the same for other savings goals like vacations, a new car, or home repairs. Get your savings accounts opened before the deadline to file your taxes so that you can use your refund to grow these accounts.
Get Ahead on Debt Payments
Using your tax refund to pay off debt is a smart move. Slaying debt is a form of savings, after all. Aggressively paying off debt will save you a lot of money in interest on your current loans and credit cards. It will also improve your credit score, allowing you to be approved for future loans and credit cards at lower interest rates. Check out these different methods of slaying debt. Regardless of how you choose to pay it off, the most important thing is your commitment to living debt-free.
How you choose to use your refund can lay the foundation for your finances for the rest of the year. So this tax season, give yourself a head start by planning to save instead of spend.