By Tracy Scott
Few experiences can brighten a dreary South Texas winter afternoon like learning that Uncle Sam is sending you a sizable income tax refund. While you wait for the money to arrive, it’s natural to dream about how you’ll spend it. For the 2019 tax filing season, the average refund was $3,000. A hefty cash infusion like this can pay for purchases or experiences you’ve delayed for years, such as buying a new refrigerator or booking a four-night stay at an all-inclusive resort in Cancun.
Deciding on the best use of your cash windfall should be done with your overall financial goals in mind. Here are some of the best ways to use your tax refund wisely while still earmarking a portion for a special treat.
Start a down payment fund.
Saving money for big purchases, like a down payment on a car or home, can take years. Slide into the driver’s seat of your new car or secure the keys to your new home sooner by setting aside most of your refund for your down payment. Open a Share Savings Account with your refund check and make regular deposits until you reach your down payment savings goal.
Boost your emergency savings account balance.
Do you have at least three months of living expenses set aside to pay your bills if a job loss occurs? Protect yourself before you’re hit by this or another situation that could devastate your finances. Start or increase your emergency savings fund by depositing half of your tax refund into a designated money market account. Keep these funds separate from your other savings to reduce the temptation of spending the higher yields you might earn with this type of account. Add to your emergency savings account regularly. If a financial emergency strikes, you’ll have the needed safety net to keep you from turning to high-interest rate credit cards or loans to cover unexpected expenses.
Pay off one high-interest rate debt.
Lingering high-interest rate debt can cause unnecessary financial stress and prevent you from achieving long-term financial goals. The less you pay in interest charges, the more money you can keep in your bank account. Review the interest rates assigned to your credit cards and loans to determine which one is assigned the highest rate. If you’re unable to eliminate the entire balance, commit to applying at least 75% of your refund to the debt.
Why so much? Nothing slows your financial progress like paying more in interest charges than you can earn through investing. High-interest rate credit cards often hover over 20% or more. It’s rare to find an investment option with such high returns. Eliminating this debt can have the most significant impact on your ability to build wealth now and in the future.
Invest the money.
Watch your money grow when you invest in stocks, bonds, or mutual funds. Deposit a percentage of your federal income tax return into a Traditional IRA, Roth IRA, or Coverdell Education Account. Retirement and education savings accounts can provide tax benefits to maximize your wealth-building efforts. Unsure which type of account is the best fit for your financial needs? Schedule a free, no-obligation appointment with an experienced investment advisor. They can help create a personalized financial plan that puts you on track to meet your long-term financial goals.
You might have to wait 21 days, or longer, to receive your income tax refund check. Before the funds hit your bank account, plan now how you’ll spend the cash. Doing so can put you in a stronger financial position long after the check is deposited. It’s possible to get your refund sooner when you use tax filing software like TurboTax®. Generations members can claim an exclusive TurboTax® discount by visiting the Generations TurboTax website.