- If you receive a tax refund this year, consider using it to build wealth instead of splurging.
- Use it to pay off credit card debt and student loans, or to boost your emergency savings.
- Or invest it in a retirement account or brokerage account. After all that, have fun.
The deadline to file your 2021 taxes was April 18, so unless you requested an extension, you’ve probably already filed your 2021 taxes. do it yourself, the hardest part is (mostly) over. Depending on how much you have withheld or paid throughout the year, you either owe money or you will receive a refund.
If you’ve paid too much in estimated taxes or withheld too much money from your paychecks, you’ll likely receive a tax refund. So far, the average refund this year is $3,226 – that’s quite a change!
If you have already received or expect to receive a refund this year, you may be wondering what to do with the money. Before you jump in to make a big purchase, I’d like to recommend that you take a step back and make a plan.
As a financial planner, I’m a fan of balancing long-term goals with short-term rewards. Sure, using your tax refund to buy a new pair of shoes or a fancy vacation sounds great in the moment, but it’s important to weigh the instant gratification of splurging against the long-term benefit of preparing yourself. financially for next year and beyond.
A refund (or any windfall!) is a great opportunity to start a financial goal or improve your financial situation. Here are my five favorite ways to use your tax refund.
1. Boost your emergency fund
Emergencies can happen at any time. Some are one-time expenses – a sudden medical bill or a home repair – and others are longer-term, like job loss.
This is what makes emergency savings so essential. An emergency fund can help you avoid borrowing money to cover expenses. If you don’t have an emergency fund, your refund is a good place to start. I recommend having about six months of expenses, including the amounts you spend on necessities like rent, food, utilities, and gas for your car. But remember that any amount saved is better than nothing at all.
Store your emergency cash in an easily accessible savings account, but separate from your checking account. This saves you from exploiting it for daily expenses.
2. Pay off your debts
Credit card debt is one of the most harmful forms of debt, thanks to high interest rates. If you have an outstanding balance on your card, use your refund to pay it off (or as much as you can).
If you have student loan debt, you can use your repayment for repayment. The pause on federal student loan repayments has just been extended until August 31, but you should consider paying — the pause also set your loan interest rate at 0%, which means any payment you make through August 31 will go directly to the principal of the loan, reducing your overall loan faster and reducing the amount of future interest you’ll pay. A win-win!
3. Put more towards retirement
Retirement is one of the most important goals you will work towards throughout your life. If you’ve fallen behind on retirement savings, your refund is a great opportunity to make a one-time deposit into your 401(k) or Individual Retirement Account. In 2022, you can contribute up to $20,500 to a 401(k) and $6,000 for traditional and Roth IRAs.
While it may not be the most exciting way to spend your cashback, your future you will thank you.
If you’re already on track to meet your other financial goals, consider using some of your refund to invest in the stock market. Investing is a great way to grow your wealth over time, and while the stock market may seem a bit like a roller coaster right now, remember that ups and downs are normal.
Depending on your investment time horizon and risk appetite, there are tons of investment options available. If you are more risk averse and want to take a “set it and forget it” approach, consider investing in index funds or an exchange-traded fund, which are usually automatically diversified. If you want to get more involved in your investments, consider buying individual stocks. There are also plenty of robo-advisors to help you get started.
5. Treat yourself
Even though I want to pay for your financial future first, don’t be afraid to reward yourself a little. It’s totally okay to give yourself something new with your tax refund, as long as a majority still goes to those larger financial goals.
If I get a tax refund, I usually set aside about 10% for a nice dinner out or a new piece of clothing. I consider this a mini reward for using most of my refund towards other goals. Positive reinforcement is a real thing, and splurging can help reinforce those positive money habits.