Using Your Tax Refund Wisely

[ 0 ] April 20, 2015 |

How to Make Your Tax Refund Keep on Giving

If you’re in line for an income tax refund, don’t fall into the trap of thinking you’ve hit the jackpot and can spend recklessly. After you’ve treated yourself to a little something, explore these smart ways to invest that refund in your financial health and your future.

Create an emergency fund

Your refund check can help build an emergency fund to prepare for unexpected challenges such as a job loss or medical problems, so that you can maintain your standard of living during a period of lost income. This fund needs to be safe and accessible at a moment’s notice, so federally insured savings or money market accounts available at financial institutions such as IAA Credit Union work well for this purpose.

Prepare for college and beyond

Your kids’ higher education and your own retirement may feel like faraway dreams, but time passes surprisingly quickly. The sooner you start saving, the better your chances are of being able to send your kids to college and enjoy financial security during your later years. You can put this money into a Coverdell education account or 529 savings plan to build the reserves necessary to pay for college. You can also help ensure a comfortable retirement by using refund dollars to increase the nest egg you’re accumulating for when you leave the workaday world behind.

Tax Refund

Get debt under control

If you’ve fallen behind on bills, that refund check may be your ticket to get caught up once and for all. Refunds are also well spent paying down credit card debt, and getting you out from under interest rates that can run as high as 18% or more.

With mortgage rates still holding at very favorable levels, another approach is to use a tax refund for covering the closing costs to refinance an old higher-interest mortgage and lower your payments significantly. This move will pay you back for many years to come by freeing up extra monthly cash to spend or save as you wish.

The takeaway

Putting a little thought into your tax refund can go a long way toward improving your financial health, both immediately and for years to come. When you experience the long-term results, you’ll be glad you didn’t spend the entire windfall on a wild spending spree.

 

Roberta Pescow, NerdWallet

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