Tax time is officially here and if you’re expecting a tax refund this year, you may be wondering what you should do with your sudden infusion of cash.
In California alone, tax refunds were $36.7 billion in 2015 and the average household refund was $2,810 (SmartAsset). With a sizeable refund hopefully headed your way, let’s take a moment to think about where you put the funds to work in your financial life to help you maximize its value.
Here are a few suggestions on where to put your tax refund to work:
I know, I know – this is not the most exciting thing to do with your tax refund, but it may very well be the most valuable to you. Whether you are still saving up your emergency fund for those “rainy day” moments in life or there is a large purchase you’re planning for – a tax refund is a great way to help you reach your funding goals!
You have until April 18, 2016 to make a final contribution to an IRA account for 2015. It may be a good idea to maximize contributions to your IRA accounts. (Go here to see how much the government allows this year.) Why? Because the more you save now, the more tax-sheltered gains you can accumulate over your lifetime. And the earlier and more you save, the more time your money has to grow! This can be a highly valuable use of your tax refund.
Whether you make a formal gift to your favorite charity, your religious institution, or you simply want to use your tax refund on someone else, gifting the money can be incredibly powerful with both tax benefits and intrinsic value. Charitable gifts can be deducted on next year’s tax return. Gifts for loved ones and friends may not be tax deductible, but the value someone else receives from your generosity may be priceless.
Go on and invest it! But invest in what? Consider investing it in your personal or professional development. Investing in yourself can pay you back in figurative and perhaps even literal dividends. Maybe there is a professional conference you’ve been thinking about attending or a new fitness program you would like to start. Either way, your tax refund could be just the capital you need to make a reinvestment back into yourself.
If you have any debt outstanding, especially high interest debt from credit cards, I highly recommend that you use your tax refund to settle as much of it as possible. Outside of establishing an emergency account, paying down high interest rate debt can be one of the most valuable things to do with your tax refund.
What? A financial advisor wants me to enjoy my refund? Absolutely! The whole goal of the work I do with clients is to help people plan better so they can hopefully live better. I’m not condoning putting your refund down on a new Ferrari lease, but if you’re on track I think it’s great to buy yourself something or an experience that you truly enjoy.
If used wisely, tax refunds can be a great way to jumpstart your financial planning goals or help you reach them more quickly. Knowing what your financial goals are and having a documented financial plan can go a long way to keep you on track and inform everyday money decisions.
So, how will you be spending your tax refund this year?