Receiving a tax refund is exciting and can give you a much-needed financial boost. However, it’s important to remember that this isn’t just free cash. Your tax refund is essentially money you lent to the government, which is now being returned to you. So, it’s in your best interest to use this money wisely.
How can you spend this money so that it helps improve your financial position? The answer to that question will largely depend on your age. The following suggestions explain how to effectively use your tax refund based on your current life stage.
Students
Whether you’re working part-time in college or just starting out on your own, money tends to be tight. So, a tax refund from Uncle Sam can often feel like you won the lottery. Before you start researching hot spots for Spring Break, consider how this money could impact you longer-term.
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Eliminate Debt:
Most people open their first credit card in college. With a limited credit history, the interest rates are likely high. Using your tax refund to reduce or eliminate high-interest credit card debt is an excellent strategy. Instead of making interest payments monthly, you’ll free up money that can be spent in more practical ways.
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Cover Expenses:
Every dollar you borrow in student loans is money you have to repay, plus interest. Using a portion of your tax refund to cover some school costs now could significantly reduce the total price tag of your college experience.
Young Professionals
Life in your twenties is an exciting time. From landing your first career-oriented job to earning more money and living independently, it screams freedom. However, it’s also the best time to save and invest your money.
The greatest wealth maker is time, allowing your money to grow and benefit from compound interest. Depending on your financial goals, here are three areas where your tax refund could provide significant benefits.
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Invest in Your Retirement:
Even minimal deposits into tax-advantaged retirement accounts can grow significantly over the next 40 years. Consider opening a Roth IRA or contributing to your employer-sponsored retirement plans.
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Save for a Home:
Buying a home is a major milestone. However, the initial costs can keep that dream at bay for many. The sooner you begin putting money aside for upfront expenses, such as a down payment and closing costs, the better. Your tax refund could provide that first step toward reaching this goal.
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Start an Emergency Fund:
Unexpected expenses always find a way of popping up at the most inconvenient times. Don’t let these costs derail your budget or savings plan. Instead, use your tax refund to begin or boost your emergency fund.
New Family
Starting a family comes with a slew of new expenses. And these costs only grow as your family expands and children age. At this point in your life, maximizing every penny is essential – which means keeping debt under control and making investments that will generate significant returns.
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Consolidate Debt:
New expenses pop up regularly for parents. From childcare to extracurricular activities, there’s always some cost tugging at your wallet. As a result, many turn to credit cards to make ends meet. Consider consolidating your high-interest credit cards into a lower-rate loan. Then, use your tax refund to reduce the balance as much as possible.
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Start a College Savings Plan:
While money is typically tight for young parents, it’s also the best time to save for your child’s future college expenses. Using your tax refund to open a 529 college savings account could give you a head start. If you begin when your child is a baby, this money could grow for 18+ years into a significant amount.
Mid-Career
As your children grow and you move up the corporate ladder, your responsibilities will also increase. Maintaining your home and managing your retirement accounts tend to take center stage. Luckily, your tax refund can help with both.
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Build Home Equity:
Tapping into your home’s equity is an affordable way to cover just about any expense. From home repairs and upgrades to serving as a financial lifeline, home equity is a powerful tool. Using your tax refund to make one extra mortgage payment annually will reduce the amount of interest you pay and build equity in your home faster.
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Maximize Retirement Accounts:
As retirement begins to weigh more on your mind, using your tax refund to top off your retirement contributions is an excellent strategy. Whether it’s maximizing your IRA contributions or ensuring you reach your employer’s 401(k) match threshold, your tax refund is sure to help.
Pre-Retirement
With retirement on the horizon, your mind is likely focused on your golden years. To prepare for this transition, it’s wise to eliminate any lingering debt and fine-tune your retirement plan.
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Pay Off Debt:
Heading into retirement debt-free is a wonderful feeling. While you might not be there quite yet, consider using your tax refund to pay extra toward your outstanding balances. Whether it’s credit card debt, a mortgage, or your car loan – every bit helps.
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Reduce Your Tax Bill:
Most find their final years in the workforce to be their peak earning years. If you’re in a higher tax bracket, investing your tax refund into a Traditional IRA or 401(k) could reduce the current year’s tax bill.
We’re Here to Help!
Receiving a tax refund from Uncle Sam is a wonderful feeling. However, there are many ways to use these funds strategically to better your financial position. Take some time to review all your options and find which opportunities best suit you. And there’s nothing wrong with keeping a little of your refund as fun money!
If you’re interested in learning more about how to use your tax refund to eliminate high-interest debt, we’re happy to help. Please stop by the Credit Union or call 410-687-5240 to speak with a team member today.