The Smart Way to Use Your Tax Refund

One line of thinking reasons it makes more sense to optimize your withholdings so the government gets exactly what it needs from each of your paychecks. This way you avoid giving it an interest–free loan each year.

Another school of thought believes it’s nice to get a lump sum in the first quarter of each year. After all, you can do more with that lump sum than you could if you got the money piecemeal.

It’s important to recognize the smart way to use your tax refund if this second line of reasoning seems more logical to you.

Break Free of Debt

Yes, a new motorcycle would be a fun thing to have. However, before you splurge on wants, make sure your needs are seen to. Outstanding debt should be paid off as much as possible. This will reduce the interest you’ll pay over time, which ultimately will mean you’ll have more disposable income.  You can also use it to pay off any debt relief loans you may have taken.

Broaden Your Rainy-Day Umbrella

The importance of a robust emergency fund is difficult to overstate. Simply put though, there are two categories of people when it comes to unexpected expenses. Well, actually three. These are those to whom it has already happened, those to whom it will happen and those to whom it will happen again.

Trust us, you fit in there somewhere.

Using your tax refund to shelter you from those storms is going to seem like a brilliant idea when your refrigerator suddenly malfunctions, your car starts to backfire repeatedly or you sustain an injury requiring medical treatment. Having that cash on standby could be the difference between dealing with it out of pocket and going into debt.

Beef Up Your Retirement Fund

With your debt in check and your butt covered against the unforeseen, it’s time to turn your attention to what you’ll do for money when working for it is no longer an option. The best play here is to have as much money as possible working for you.

If you have a 401(k), you can contribute your tax refund check each year to help it accumulate interest more rapidly. Otherwise, look into a Roth IRA or something similar in which you can park the cash so it grows while chilling.

Build a Better You

Take a course to learn how to make money doing something you enjoy doing. Maybe you’ve always wanted to be a photographer, or make clothes, or bake or something else you can do for fun that can be monetized. This makes your money make more money, even as it gives you something fun to do.

Buy a House

OK, so the likelihood of doing that with just one refund check is low. However, pooling a bunch of them together over the years could net you a respectable down payment on a nice place.

Yes, it will take time, but that’s how life is lived y’all — one day at a time. Putting long-term satisfaction over instant gratification will net you a solid set of more comfortable tomorrows.

Broaden Your Horizons

And yes, we know we listed five ways to use the money, even though the article is only supposed to be about one. However, all five of them really boil down to one smart way to use your tax refund.

Do something with it to make tomorrow more financially secure than today.

Whether it’s paying off your debt, saving for a rainy day, growing your retirement account, educating yourself or acquiring property, the end result of each of those actions is absolutely the same.

You’ll be better off in the long run.

Posted in: Personal Finance

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