You file your taxes and hold your breath. Are you about to owe the government a huge sum? Or is a sizable tax refund heading your way?Â If it’s the latter, you’re probably asking yourself “What should I do with my tax refund?” Â This can be a great opportunity for you to fund some of your financial goals. Here are some ways to use your tax refund responsibly.
Use Your Refund to Pay Off Debt
If you have high-interest credit card debt, pay that down first. With some credit cards charging more than 15% APR, this move will save you money in the long term.
If you have student loans with interest rates above 5%, apply this money to those next. While the interest rate on student loans is generally much lower than credit cards, it’s a good idea to pay your loans off as quickly. Paying off a student loan with your tax refund will free up cash flow from your monthly budget, which can then be redirected toward your other goals. After all, who wants student debt hanging over their head for a decade?
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Save for Retirement and Health Care
Another great way to put your refund to use is a health-savings account, or HSA. If you have a high-deductible health plan (HDHP), you can set money aside tax-free to use on qualified medical expenses. Make sure your health care plan is “HSA eligible” before opening an account. Only certain HDHPs qualify.
Prepare for Emergencies
It’s really important to have money set aside for emergencies. According to a recent Bankrate survey, only 37% of Americans are prepared to pay for an unexpected expense of around $1,000. 2
If you don’t currently have emergency savings set aside, you can use your tax refund for this purpose. Aim for one month’s worth of income to start, with the ultimate goal of saving at least three month’s worth. Park this money in a high-interest savings account. You want emergency savings to be easily accessible when you need it, but not so accessible that it’s easy to spend on non-emergencies.
Splurge a Little
Let’s say you’re super-responsible and already save for retirement and emergencies, and you have little to no debt (or you still have money left over after funding the things outlined above). It’s okay to use your tax refund as a reward, too. Maybe plan a trip with that money, or use it on some home upgrades. Or if you have investment accounts, you can add to them and let this money grow over time.
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