Tax season is right around the corner, and it may be helpful to have a plan for the funds you expect to receive from the IRS. You may be tempted to spend the cash right away and treat yourself, but there are so many great things you could do with the sum that you won’t regret it later. Here are some responsible ways to use your tax refund:
1. Create an emergency fund
Many Americans don’t have an adequate savings account accessible in case of a sudden financial need. A lack of savings leaves you vulnerable to a job loss, medical emergency or major repair and can force you to seek out short-term loans at high interest rates or carry credit card balances for an extended period. Using your refund to start or augment an emergency fund could leave you breathing easier should one of those events arise.
2. Send it to savings
The IRS allows you to split up your refund in up to three accounts via direct deposit. That’s a perfect opportunity to stash some funds in a savings account that’s inconvenient for you to access, assuring that the money stays out of sight and out of mind until you really need it.
3. Pay off debt
If you are carrying a balance with a high-interest rate, consider using your tax refund to pay that off. It doesn’t make much financial sense to put the IRS check for $3,000 in a fund yielding low interest. Once you’ve paid off those high-interest rate loans, you can start putting more money into a savings account every month.
4. Fund your retirement
What better way to sock money away for retirement than by using funds that aren’t a part of your paycheck anyway? You can use the funds to open a Roth or traditional IRA. You’ll probably be grateful that you had the foresight to save for retirement rather than spend it on something you’d have long since forgotten about.
7. Make home improvements
If you live in an older home, spending some of that refund around the house can lower energy bills. Replacing old windows can improve the efficiency in the winter and in the summer by reducing your electric bill. Old appliances can be replaced by models that use less energy. If your kitchen or bathroom is out of date a remodeling project can improve the functionality of your house now and also make it more attractive when you decide to sell.