If you’re expecting an income tax refund this year, you’ll want to make sure you put that money to good use. While it can feel like you’re receiving a windfall, remember that this is just excess money that you paid the government. This doesn’t mean you can’t have a little fun, but this money can also provide a great boost to your other financial goals.
Pay Off High-Interest Debt
Credit cards generally have high interest rates and carrying a balance on these cards is costing you money. A great use for some or all of that refund is to pay down some of this debt. Paying off credit card debt will mean you’re now saving 10, 20, or even 30 percent per year in interest charges. This is a guaranteed return on your money and a wise choice for your tax refund.
Make an IRA Contribution
If credit card debt isn’t much of a concern for you, the next place to look is in retirement accounts. This can be in the way of either a traditional or Roth IRA. If you’re eligible for a traditional IRA contribution, you will actually receive an added benefit of being able to deduct that contribution from your taxable income next year. Or, if you decide to put the money into a Roth IRA, you won’t receive the tax benefit now but can withdraw it tax-free later.
Not only are there tax benefits from making IRA contributions, but you’re doing a good thing by saving more money for retirement. The sooner you can put money away, the more time it has to grow, and this can result in significant savings by the time you reach retirement.
Increase Your Emergency Fund
In addition to paying down some debt and tucking some away for retirement, you should consider making a deposit into your emergency fund. Emergency funds are vital to any financial plan and these funds will come in handy when there is an unexpected expense. Instead of using a credit card or taking a loan to pay for a broken hot water heater or another unexpected expense, you can easily tap into your emergency fund instead. Here are some recommendations for where to keep your emergency savings.
Make an Extra Mortgage Payment
If all of the above items are taken care of, you can still find another way to put this money to work by making an additional mortgage payment. When you make an additional payment, it is applied directly to the principal. This instantly gives you more equity in your home, saves money on interest over the term of the loan, and even reduces the time it takes to pay off the loan.