If you’re anticipating a large tax refund during tax season, congratulations! You’ll be getting some tax-free funds to spend any way you choose. Although the tough economy has made it difficult for Americans to establish savings accounts, a sizeable tax refund could be the perfect start to a savings program. Here are three options to consider:
Replenish or Establish a Savings Account
If the recession or a job loss have wiped out your savings account, consider applying your tax refund to replenish it. While it may be tempting to spend your refund on the latest electronic system or a vacation, it’s a wiser move to put it into savings. The extra funds could come in handy should there be sudden job loss, unexpected car repairs, or an illness that exceeds your paid time off from work.
Financial planners typically will recommend building up three months’ worth of expenses in an emergency fund. Although that goal is out of reach for many people, even a reserve fund of one month’s expenses can help. The goal is to create a buffer between you and the financial hardship that can come with unexpected expenses or illness.
Pay Down Debt
If you’re weighed down by credit card debt or student loans, now might the be the time to start chipping away at those debts. Start off with the account that carries the highest interest rate, and work your way down to the lower interest rate accounts. Any payment you can make above and beyond the minimum payment will help to reduce your credit balances in the long run. A tax refund windfall might be just what you need to start seeing your credit balances head in the right direction.
Think About Investing
Even though long-term investing is reserved for future goals such as retirement, it’s never too early to start. If you receive a sizeable tax refund, now is the time to think about beginning an investment program if you haven’t done so already. Your tax refund could work for you long-term if you divert it to a 401(k) account or IRA.
You’ll not only be stashing money for the future, but you will also start to earn interest on that money over time. In addition, you’ll be able to take advantage of the IRA tax deduction to continue to build your investment portfolio. Every little bit helps toward your future goals, whether its retirement, home ownership, or sending your kids to college one day.
If you are anticipating a large refund this year, it may be tempting to spend it on a vacation or other “fun” items after paying for necessities. However, establishing or replenishing your savings account, paying down existing debt and/or starting a long-term investment program are all options that allow your money to work for you in the long run.