Expecting a tax refund this year? No matter the amount, it can be a struggle to figure out what to do with your tax refund. Deciding on the best use for your refund depends on your financial situation and your future goals.
Here are a few tips:
- Create or Build Up an Emergency Fund
- Make a Payment on Your Debt
- Save It in an Interest-Earning Account
- Boost Your Retirement Fund
- Start a Business or Support Your Side Hustle
1. Create or Build Up an Emergency Fund
Whether it’s a car accident, job loss, or unexpected medical bills, financial emergencies can happen to anyone at any time. Unanticipated expenses can drastically cut into your budget and affect your ability to keep up with monthly bills, potentially forcing you to seek short-term loans with higher interest rates or carry a credit card balance. By building and maintaining an emergency fund, you’ll have a cushion to help you stay afloat if an emergency arises.
Consider using a portion of your tax refund to bolster your emergency fund savings so you’re better prepared for the unexpected. A commonly shared guideline for an emergency fund is saving three to six months of your expenses, but that looks different for everyone. To help calculate how much you might need in an emergency fund, take a look at your monthly expenses, like housing, utilities, transportation, and debt.
2. Make a Payment on Your Debt
Are you carrying a credit card balance? Do you have personal loan or student loan debt? Credit card balances and other loans often come with interest rates that can drain your finances over time. Using your tax refund to help pay down these debts could be a great opportunity to make a larger-than-usual payment, helping you save on interest and potentially improving your credit score.
3. Save It in an Interest-Earning Account
Depositing money in an interest-earning savings account helps your money work harder toward your financial goals. If you add a portion of your tax refund to a savings account, you can help jump-start your savings for a new appliance, a family trip, a celebratory dinner, or your emergency fund. Depending on your goals, there are a variety of savings account options:
- Savings Accounts: Basic savings accounts allow you to deposit money, earn interest, and withdraw funds, but they typically earn lower interest rates compared to other savings options.
- High-Yield Savings Accounts: A high-yield savings account pays more interest on the balance of your account compared to a traditional savings account. Other than that, a high-yield savings account works much like a traditional savings account—it’s a convenient place to store your money and earn interest to help grow your personal wealth.
- Money Market Accounts (MMAs): Money market accounts usually earn higher interest rates, often requiring a higher minimum balance to open and maintain the account, but the funds can usually be accessed through online transfers, ATM withdrawals, or check-writing privileges, making them convenient options for vacation savings and other short-term goals.
- Certificates of Deposit (CD): CDs typically offer a guaranteed rate of return that’s often higher than a savings or money market account, but you’re required to keep your money untouched or “locked” in the account for a specific period of time. With most CDs, there’s a penalty for withdrawing funds early, making them an interest-earning opportunity for long-term goals, like weddings or home down payments.
4. Boost Your Retirement Fund
It’s never too early to plan for your retirement. Whether you have an employer-provided 401(k) plan, an individual retirement account (IRA), or both, contributing your tax refund in part or in full to a retirement fund can help boost your overall savings and help support your long-term financial goals. If you feel comfortable with your emergency fund savings and debt payments, consider using your tax refund to invest in your retirement—your future-self will likely thank you. Plus, there are a variety of retirement calculators that can help you understand the right contributions for your financial situation.
5. Start a Business or Support Your Side Hustle
A side hustle is an entrepreneurial hobby or extracurricular occupation that helps support your overall financial goals. Enjoy working on cars for a little extra cash? Your tax refund could help you pay for parts and other necessary tools. If knitting, embroidery, or crafting is more your style, some cash from your refund could help you afford more supplies and support an online store.
If you drive a car for a ride-sharing company or a delivery service, your tax refund could put some extra gallons of gas in your tank or fund an overdue tune up. No matter what kind of side hustle you prefer, the extra cash from a tax refund can help give your endeavors a boost and help you make more money in the long term.