Tax season is here, and millions of people are getting a tax refund. Are you one of them? If so, you should plan ahead for what you’ll do with it.
Rather than spending it before you have it, dust off your financial plan so you’ll have an idea of what to do with the funds to make the most out of the extra chunk of change. Of course, getting the most out of your tax refund can include some fun things; you don’t have to save every penny. Here are some of the top ways to use your tax refund this year.
Create an Emergency Fund
This is vital for everyone. If you don’t have at least three to six months of expenses set aside for an emergency, use your tax refund money to build it. What would happen if you lost your job today? How would you pay your bills?
This is what an emergency fund is for; open one in an account separate from the bank where your checking account is, making it inaccessible for everyday spending. With interest rates going up, there are now high yield savings accounts paying over 4%, so your emergency fund can continue to grow.
Get out of Debt
If you’re paying high interest rates on credit cards or personal loans, use your tax refund to pay it off or at least down.
If you aren’t sure which to pay off first, consider these steps:
- Order your debts from smallest to largest balance.
- Make the minimum payment for each debt.
- Put your refund toward the debt with the smallest balance first.
- Apply any “extra” money to the next debt in line.
- Keep this process going even after you spend your refund to get yourself out of debt.
Invest in your Retirement
If you haven’t started a retirement fund yet, use your refund from your tax return to start one. You can open an IRA and contribute up to $6,000 in 2022 (if done before April 18, 2023) or $6,500 in 2023, potentially getting a tax deduction for doing so. Add an extra $1,000 to those numbers if you’re over 50! This is one of the best ways to use your refund because you can get even more tax benefits for doing so.
Invest in a College Fund
If you have kids, you can invest the money in a 529 savings plan and potentially get a state tax write off. The money will grow tax free, and if you withdraw the funds for eligible educational expenses, your withdrawals are tax free as well.
Invest in a Brokerage Account
If you’re all set with retirement funds and a college savings fund, consider investing your funds with a brokerage account. You can invest in stocks, bonds, real estate, or commodities.
Already Doing All of These?
If you have all these bases covered, then there’s no problem with using some of the funds for a nice dinner, taking the family on a mini-vacation, or even a fun staycation.
Final Thoughts
Giving thought to how you want to handle your tax refund before it’s here is the best way to ensure you don’t squander the extra cash. Even if you decide to go ahead and spend some of it, you’ll be ahead of many because you took the time to review your financial picture. Want to know how your financial plan is looking? You can send an email to Questions@FSAinvest.com or click here to schedule a call with one of FSA’s Certified Financial Planner™ professionals.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is also available at https://fsainvest.com/disclosures/ or by calling 301-949-7300.
