It’s easy to view your tax return as “extra money.” You may be tempted to use that money to go on a shopping spree or take a vacation. But the truth is that your tax refund is part of your yearly earnings and should be used in practical ways. Saving your tax return money, paying off debts, and making smart investments are really the three top ways to put those dollars to their best use.
In addition to putting it straight into a savings account, there are some other simple tactics you can use to get the most out of your tax return. Let’s explore a few.
Keep an Emergency Fund
Even if you already have a savings account, make sure that you’re keeping enough funds to cover your monthly expenses for 3-6 months. In the event that you would have a medical emergency or unexpectedly lose your job, you should keep enough of a cushion to get you through those tough times in order to avoid racking up your credit card debt.
Use Your Tax Return to Pay Off Debts
Any time you put a dent in what you owe, it does wonders for your long-term financial success. Start with the debts that have the highest interest rates first and address lower interest loans later. By paying off debts quickly, you can avoid paying more interest than you need to.
Pay More than the Minimum on Your Mortgage
While a mortgage is technically a type of “debt,” we’re putting it in its own section. Making higher payments on your mortgage, even if it’s an extra hundred dollars a month, can save you a substantial amount of interest and cut many years off the loan. If you can pay off your mortgage ahead of schedule, that’s more money in your pocket each month that you can put towards retirement, a down payment on your next home, or other investments. It also means that you’ll have built more equity into your home when it comes time to sell your property. So any time you have extra cash, don’t forget that your monthly mortgage payment is a great place to put it. If you’d like to see just how much impact extra mortgage principal payments can have, try using our financial calculators to see how the money shakes out.
Boost Your Retirement Savings
If your credit card debt is under control and you have the emergency fund covered, consider making a contribution towards your retirement plan. Whether it’s a Traditional or Roth IRA, it’s never too early to start saving. Even if you are nearing retirement, you may have the opportunity to make a catch up contributions. Let Union Community Bank help you decide what your best options are.
Try to think of tax season as a perfect time to evaluate your financial health. Whether you’re securing your tax refund money in your savings account or watching it grow in an IRA, you should always approach your return as money that is part of your earnings, not an unexpected bonus check. While you should never rely on receiving a sizable tax refund in order to cover standard expenses (such as auto insurance and other regular bills), it’s still money that you’ve earned throughout the year and should be treated as such. Take the opportunity to put the money to good use so you can further your financial goals.