Are you on track to receive a tax refund? If so, it can feel like a windfall or even like winning the lottery. The natural desire to spend “found money” can easily spiral into ideas of grandeur. While jetting off on vacation, or buying that new gas grille, are worthy causes, take a pause. There are a few financial strategies you might consider first.
In response to a new NerdWallet.com survey, 54% of folks who expect to get a refund said they plan to save or invest the money….And some of them actually will!
Pay Down Credit Card Debt
If you have run up your credit cards over the year, paying off the balance should be your first step. That’s because unpaid charges come with a hefty interest rate that can mean you wind up paying even more for everything you’ve purchased. Whittling down debt should top your financial “to-do” list. Applying a tax refund can take care of a large amount of this in one fell swoop. This gives you a highly motivating head start.
Set Up An Emergency Fund
Are you one of the 60 percent of Americans who can’t cover an unexpected $1,000 expense? Building up your emergency fund can be a smart move to help you with those unexpected realities of life—from faulty car brakes to a leaky roof to a sick pet. Just remember that the money should only be used for true “emergencies” (and no, a sale at your favorite department store doesn’t count).
Time for Home Improvements
While saving for a rainy day might be fiscally responsible, it also might strike you as a little boring. Tackling important home improvements can give you the benefit of improving the value of your home—while giving you something you can enjoy today. According to Remodeling magazine’s 2019 Cost Vs. Value report, the top home improvement that brings the most value is a garage door replacement, while other top projects that will simultaneously boost your satisfaction include minor kitchen remodels and deck additions.
Another smart choice—although, admittedly, less exciting than a sparkling new kitchen—is to make energy upgrades. Believe it or not, when Remodeling Magazine used to include insulation on its list of home improvement projects, attic insulation had an astonishing 117 percent ROI. Adding insulation and other energy-efficient features may also allow you to keep more money in your wallet all year long in the form of reduced energy bills.
Share Some Goodwill – Make a Donation
Spending money on yourself is fun—but spending it on someone else can feel even better. If there’s a cause you’ve been wanting to support, allocating part of your refund to a local school or women’s shelter can put a spring in your step that no new sandals ever could.
Of course, we don’t want to be spoilsports. Sometimes getting a tax refund is a fun way to reward yourself for the hard work you’ve done all year. So by all means, earmark it for a whim. Use it for a long weekend at a nearby resort or a wardrobe refresh. Just make sure that any choices you make today won’t impact your financial future. Perhaps consider allocating the majority of the refund to one of the financial goals above. Then, use a small percentage for a planned splurge. Ensure that you identify exactly what you’re spending it for. Letting the money absorb back into your account, or spending it something forgettable won’t have the same emotional impact as putting it toward something specific and enjoyable, even if it means delaying the gratification.
Review and Adjust Your Withholding
Remember, as exciting as it is to get what feels like a windfall as a tax return, that money actually is yours. It could have been in your paycheck all year long. Having that extra bump throughout the year can allow you to keep your emergency fund strong. It also can be the difference in paying off your credit card bills in full. This offers ongoing financial rewards. You could also use it for a weekly date night or support the nearby senior center regularly.
If you’d like to revisit your withholding to potentially make changes, talk to your HR department. They can help review your current status and the paperwork required to change it. Of course, it’s always wise to talk with a tax professional if you have any questions. But letting Uncle Sam keep your money all year—interest free!—is rarely the best use for it.