Most people spend the first few months of the year getting back into the swing of things, working on new projects on the job or putting in effort to accomplish a new year’s resolution or two. With shorter days during the winter and not much on the calendar to look forward to until spring arrives, it’s often a challenge to find a bright spot in the first quarter of the year. But if you’re one of the millions of people who expect a tax refund, your start to the year may feel a little less dull.
According to the IRS, the average tax refund for the 2015 tax season was slightly over $3,000. That amount of cash can quickly change your financial picture, but only when you have a plan for how you will put it to use. Here are the best ways to use your tax refund this year.
Wiping the slate clean when it comes to debt is one of the smart ways to use your tax refund. If you’ve overdone it on credit card spending or have a loan tied to your vehicle or other collateral, take some if not all of your tax refund to pay off the balances. Removing debt from your personal balance sheet helps you save money in the long run since you won’t be accruing interest on borrowed money. Before pulling the trigger on debt payments, make sure you don’t have a pre-payment penalty with your lender.
If you’re debt-free but wondering how to spend your tax refund, consider setting it aside for a rainy day. Most personal finance gurus recommend having at least three months of expenses saved in an easy-to-access account to help cover financial emergencies, like losing your job, dropping down to part-time hours, or needing medical attention not fully covered by health insurance. Tapping into your own savings makes you the bank, allowing you to reduce the amount you need to borrow from someone else.
After you’ve taken care of debt and your emergency fund, one of the best ways to use your tax return is investing in your future. Retirement is often the biggest goal you will save for over your lifetime, and contributing to that “bucket” early and often has a lasting impact on your overall financial picture. Check if you have access to an employer-sponsored retirement plan, like a 401(k), or consider your options for an individual retirement account, like an IRA or a ROTH. Putting just a few dollars in one or more of these accounts is a smart way to use your tax refund this year.
While some of the best ways to use your tax return involve being responsible with your spending, it’s okay to have a little fun, too. No, it isn’t a wise choice to buy a big-ticket item if you have balances owed on cards or loans, but using 10% of your return for something you’ve had your eye on for a while is a healthy move. Think phone upgrade, a new outfit, or a weekend road trip if you’re stuck on how to spend your tax refund while keeping your other financial obligations in check.
The best ways to use your tax refund vary for everyone, but these tried and true strategies help set you up for financial success in both the short and long term.