4 Tips On How To Use Your Tax Refund Wisely
Tax time is a highly anticipated time of the year for those who know they'll be getting a refund. It's also a time when it's very easy to get carried away after receiving that refund check or deposit. Shopping, trips, pampering etc are all things I've heard people mention they'll be doing with their tax refund, however, it's important you have a plan in place so you are using your tax refund wisely.
Yes, it's ok to go shopping, book the trips and pamper yourself but it's also important to prioritize saving and paying off debt and your tax refund can provide a big boost to your savings or make a big dent in knocking down your debts.
If you follow this blog, you'll know that I'm a big fan of investing in index funds (see my post here) and whenever I get some extra money, I put a portion towards my index fund investments through my brokerage account - one example of what you do with your refund!
That being said, I've been able to enlist Fidelity Investments Vice President, Onisa Treibs to share her top tips to help use your tax refunds wisely:
1. Build up your emergency savings
Emergencies and unexpected expenses happen without warning. It's very important to set aside between three to six months' worth of essential living expenses in an emergency fund to make sure you’re prepared.
The IRS makes it easy for taxpayers to save their refunds with free direct deposit in up to three accounts.
2. Put it towards your future
Opening a Roth or Traditional IRA and investing your tax refund is a great way to grow your money for retirement. You can even use the free direct deposit option noted above to have some, or all, of your refund money sent directly to your IRA.
3. Commit to a split
While we all love treating ourselves to a splurge purchase, it’s important to balance this by saving or investing some of your tax refund, too. Decide up front what your spend/save split will be – whether it’s 50/50, 40/60 or 30/70 – and commit to it so you can have your treat and still stay on track with your financial goals.
4. If you have debt, put your refund towards it.
Your tax refund can be a big help when it comes to putting a lump sum towards your debt. It can help you pay off your debt faster and the quicker you become debt free, the more money you have to put towards the things that really matter. Like saving, investing and pursuing your dreams!
Bola Sokunbi is the founder of Clever Girl Finance and she's passionate about helping women take control of their money so they can live life on their own terms.