By Megan Renart
Ah, the much-anticipated tax refund. Have you already started imagining what you might spend it on, like a shiny new tech toy or much-needed weekend getaway?
It can be a nice infusion of cash, but really, what should you do you with your tax refund? How can you use it responsibly?
Yes, the dreaded “R” word — responsibility. Did you just picture your dollar bills swirling down a drain into something you may find boring, like a savings account? Don’t groan just yet. We have an order of operations on how you can handle your windfall in a way that’s both beneficial and fun.
Think of it as the 80/20 rule: It’s OK to “blow” 20% of the windfall, but consider using 80% of it to put that tax refund to work! You can strengthen your financial situation and use the following to:
• Build an emergency fund
• Pay down high-interest or long-term debt
• Apply to longer-term goals (retirement or children’s college education)
• Use toward a big-ticket item, like a new car or house
Not sure where to start? These questions can help you determine where that 80% of your refund should go.
Do you have any bills that are currently past due? Late fees can compound the amount of money you owe, and debt can quickly spiral out of control.
Do you have an emergency fund to cover life’s unexpected expenses? Experts recommend three to six months in savings to cover living expenses should you lose your job or experience an emergency that requires a hefty amount of cash. “Even if you’re receiving a small tax refund, every little bit helps,” says Mikel Van Cleve, a CERTIFIED FINANCIAL PLANNER™ practitioner and director of personal finance advice at USAA. “If you don’t have $1,000 saved yet, focus putting money aside for that. It’s not a matter of if but when something unexpected happens — even if that unexpected expense costs $250, that’s less you’ll have to charge on a credit card.”
Have you maxed out your retirement contributions? You can always take out a loan for a car or a home, but no one will give you a loan for retirement — so if you haven’t started saving intently for retirement, start . . . now.
Do you have any of the following debt?
• Student loan
• Credit card
• Medical debt
• Home mortgage
• Car loan
If so, an extra payment can make a dent and help you climb out of a hole much quicker. Lowering the outstanding balance from month to month means less interest to accrue, which will help you pay balances down faster.
Are you currently saving for a big-ticket item, like a house or a new car? If so, then some or all of your tax refund may go toward that.
If you have an emergency fund, are saving for retirement and properly managing your debts, excellent! You can afford to spend money on something that improves your quality of life, such as a vacation, a gym membership, a coding class or a home improvement project. Just don’t let your spending get out of control.
Bank products provided by USAA Federal Savings Bank, Member FDIC.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
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