13 Smart Tips for Using Your Tax Refund

accountantIt’s that time of year again – tax time. A lot of people are gathering up their W2’s, 1099’s, receipts, etc. and seeing how they fare with the taxman. According to Business Insider, nearly 8 out of 10 tax filers in the United States receive some form of a tax refund, with the average amount being paid at around $2,895 – though it does vary by state.

It’s a smart move to plan out precisely what you’d do with any money received from a tax refund. If you make a solid plan on what you will do with the money, the least likely you are to blow it on frivolous things. Let’s take a look at some of the smartest ways you can utilize your tax refund this year.

Start or Add to Your Emergency Fund

A very large percentage of Americans are unable to pay for a $500 emergency, without having to pull out their credit card. It is important to build up an emergency fund so you don’t have to put yourself into debt anytime an emergency strikes.

The minimum that an individual or family should have on hand for emergencies is $1,000, but it is never recommended to stop there. A fully funded emergency fund should hold between three months and a year of household expenses. It can take some time to build up a fully funded emergency account – but it is important to continue adding to it until you reach your goal.

Pay Down or Pay Off Debt

Whether you have student loans or credit card balances that have been plaguing you, a tax refund or even a bonus at work can greatly help. If you have more than one loan or credit card that needs to be paid off – start with the one that has the highest interest rate. The longer you take to pay on your debts, the more money you will pay over time due to accumulated interest.

As you pay down your debt, your credit score should slowly improve. One of the higher impacts to your credit score is credit card usage – how much credit you are using compared to your total credit limits. Just be sure that after you pay off any debts, you follow through will responsible credit usage. Don’t make charges on your credit card that you will not be able to pay off at the end of the month.

Start a Roth IRA or add to an Existing Roth IRA Account

Those who are under age 50 can save up to $5,500 per year in an Individual Retirement Account. Those who are over 50 are able to contribute up to $6,500 per year into an IRA. If your tax refund is large enough, it could come pretty close to allowing you to max out your IRA for the year. If you continually do this on a yearly basis, you’ll have a great addition towards your retirement savings.

Save for Your Kids’ Education

graduating classCollege is expensive, and it is only getting more expensive as the years roll on by. If you’re looking to help your kids out during their college years, saving some of your tax refund toward a 529 plan could be a smart option.

Getting some money saved as early as possible will give it longer to grow, which will cut down on the amount that will have to come out of your monthly cash flow when your kids finally head off to university.

Invest in Yourself

If you have been looking to change careers or further yourself in your current career – it may be beneficial to you to take some classes. The classes don’t have to be through a university or community college, there are different ways to achieve various certifications or expand your knowledge in your current field. Before choosing a course, be sure to do your research to ensure that the class will indeed help you to achieve your goal. Some alternate routes to expand your knowledge would be taking a course with Udemy or Codecademy.

Pay Down Your Mortgage

If you don’t have much debt to speak of and you are in a good place with retirement savings, paying extra on your mortgage may be something to consider. This would be a smart idea especially if you have a relatively new mortgage and are paying PMI. In a lot of cases, PMI can be dropped once you reach a certain equity point in your home or after a certain time limit. Paying extra on your mortgage can help to get rid of this extra expense even sooner.

If you have had your mortgage for a bit, it may be time to consider refinancing. If you are able to get a lower rate, you can save money in the long run. Your tax refund depending on size, can either pay for closing costs or help cover quite a bit of them.

Fund a Health Savings Account (HSA)

One great thing to have in case of medical emergency or if you have a lot of medical expenses each year, is a Health Savings Account or HSA. A HSA, is a savings account that lets you put away money on a pre-tax basis for qualifying medical expenses. Using untaxed dollars allows you to lower any overall health care costs to cover deductibles, co-pays, and various other medical expenses.

HSA’s can only be used if you have a high deductible health plan – which means, a deductible of at least $1,350 for an individual or $2,700 for a family. For 2017 the maximum you could contribute for an individual was $3,400 and up to $6,750 for a family.

One great thing about HSAs is that if you do not use all of your funds in a calendar year, they roll over – you will not lose them.

Purchase Stocks or Bonds

One thing you may want to consider, is investing in some stocks and/or bonds with your tax refund. If you are just starting out, it is best to be conservative. Shop around and find a broker that isn’t asking too much by way of fees and commission – and make sure they are reputable. Start with ETFs, Mutual Funds, or stocks that seem to be a little more stable than the overall market. Do your research – make sure you don’t invest on impulse.

Take Care of Your Ride

If you are due for some new tires or maintenance on your vehicle that you haven’t been able to afford – your tax refund may be just the thing to get your vehicle in better shape so it can keep you on the road for longer.

Put Towards a Down Paymentgrowing savings

If you’ve been saving up for a down payment on a home mortgage, putting your tax refund toward a “house fund” might mean that you can finally pull the trigger and purchase a home. In some parts of the country, FHA or USDA loans could allow you to get into a home with a lower down payment. If your tax refund is large enough, it could fully fund a down payment or come close.

Additionally, owning a home allows you to build up your net worth over time as your payments go toward equity in an asset that you could sell at a later date as long as the value stays stable or increases.

Upgrade Your Appliances

If you own older appliances, you’re probably bleeding quite a bit of money each month because of electric or gas bills. Newer appliances have much better energy efficiency ratings than those that were common even ten years ago. This means that an upgrade of an appliance or two could actually save money over the long haul. It’s better to buy a new appliance when the money is available, rather than buying one on credit.

Upgrade Your Windows

Much like older appliances, older windows can be energy hogs. Many older homes have single-pane windows that do not have much of a barrier against the outside weather. This means that your HVAC system has to work harder to cool your home in the summer. It also has to work harder to heat in the winter. Some energy efficient windows can cut down on much of this cost by using double or triple panes as insulation. Installers will also work to cut down on drafts leaking through the windows.

Take a Vacation

Americans work pretty hard. We’re the only developed nation on earth that does not require employers to offer vacation time to employees. Most jobs will provide at least a week or two, if not more, of paid time off. Many Americans fail to take what they’re entitled to. A tax refund could provide the perfect opportunity to take a few days to decompress and relax without the pressures of the office bearing down on you.

While it won’t allow your money to grow, it could allow you to cut down on stress, which will benefit your life in many ways. If you do opt to take a vacation – make sure that you don’t exceed the amount of your refund.

There are a lot of smart and savvy moves that you can make with your tax refund that will benefit you for years to come. How do you plan on using your refund? Please share in the comment section below!