Each year, the overwhelming majority of tax filers wind up with some sort of refund from the IRS. Now there's talk that this year, refunds may not be as substantial as in previous years, since the new withholding tables introduced last year caused many workers to pay less tax than usual. Still, there's a good chance a large percentage of filers will see some money back from the IRS this tax season. If you're one of them, here are a few good uses for that money.
1. Build an emergency fund
Last year, the Federal Reserve Board found that 40% of Americans don't have the cash on hand to cover a $400 emergency. If your savings are virtually non-existent, the single most important thing to do with your tax refund is stick it directly into the bank. No matter how much you earn or what your expenses look like, you should always aim to have a minimum of three months' worth of essential living costs in savings. This will help you avoid debt in the event of an unplanned bill or period of unemployment, so if your savings are sorely lacking, your tax refund could help bridge the gap between the money you have and the money you need.
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2. Pay down costly credit card debt
Whether you're carrying credit card debt from the holidays or for another reason, the longer you hang onto that balance, the more interest you'll rack up. Your tax refund, however, can help reduce or eliminate that balance, thereby saving you money and helping to improve your credit score. You see, one component that goes into that score is credit utilization, or the percent of available credit you're using at once. When that number climbs too high, your score goes down, thereby making it more expensive for you to borrow money in the future. Paying off part or all of your debt can therefore not only help you avoid costly interest, but also preserve your score, thereby making it more affordable for you to borrow money for healthy purposes, like buying a home.
3. Boost your nest egg
An estimated 42% of Americans have no money set aside for retirement. If you're one of them, your IRA or 401(k) is the perfect place for your tax refund. If you're saving in the former, you can transfer those funds directly and pad your long-term savings that way. If you have access to a 401(k) through work, you can sign up to have your payroll department withhold your refund amount from your paychecks, and then pay your refund to yourself to make up the difference.
4. Chip away at your student loans
The average Class of 2017 graduate came out $39,400 in the hole. If you're carrying a load of student debt, your tax refund might help eliminate a portion of it, thereby saving you money on interest and shortening the life of your loan. Keep in mind that if you took out private loans for college, you're probably paying a substantial amount of interest on your debt, since private loans aren't regulated the way federal loans are. And that's a good reason to get rid of that debt as soon as you can.
5. Invest in your career
The more money you're able to earn, the easier it'll be for you to maintain solid emergency savings, avoid credit card debt, sock away money for retirement, and pay off your student loans. One final thing you might consider doing with your tax refund this year is using it to invest in yourself. That might mean paying for courses to boost your skills, or covering the cost of a conference or seminar where you can network with the right people and perhaps land yourself a better job because of it. Or, you might use the money to go back to school full-time if doing so is likely to boost your earnings on a long-term basis.
While your tax refund might seem like a windfall, remember that it's anything but free money. Rather, it's your money that you were supposed to have been paid during the year but instead let the government hang onto instead. As such, you shouldn't treat it like bonus cash, but rather, the money you need to put yourself on more solid financial ground.
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