When you’re owed money on your tax return, the incoming payment can be a financial boon that serves as its own annual stimulus payment. Although it is often tempting to use this tax return to fund vacations or other luxury purchases, there are better, smarter ways to use this tax return as a stepping stone to better financial security and improved long-term wealth.
If you’re expecting a refund on your tax return or currently have that money sitting in your bank account, here are five wise ways to maximize its value.
1. Create or add to an emergency fund.
An emergency fund is one of your most important assets when it comes to building financial stability. This emergency fund creates a much-needed cushion to help you weather a loss of income, unexpected medical bills, or a number of other urgent financial needs that require quick access to cash.
Ideally, your emergency fund will contain enough money to cover three to six months of basic living expenses. If your current emergency fund doesn’t meet this recommended threshold, you may want to use your income tax return to increase its value. If you don’t have an emergency fund in the first place, a tax refund is a great way to give yourself more financial security.
2. Pay off high-interest debt.
Revolving credit card debt, payday loans, and other forms of debt can be crushing when they generate interest on a monthly basis. If you receive an income tax return and are still working to pay down debt, consider using these funds to reduce your debt and curb the amount of interest you’re being charged each month.
Instead of spending this influx of cash, you can use it to cut down your debt or even pull yourself out of debt entirely. With a clean financial record, you can divert the money you would have spent on debt repayment toward other financial goals—and with the savings created by cutting out the cost of interest, you’ll have more money at your disposal to reach those goals.
3. Grow your investment fund.
By placing your tax refund into an investment account, you can turn it into its own source of income. In the account, the money will increase in value over time and can even help fund your retirement.
Depending on your financial goals, you can choose from a general stock investment account or an investment fund that offers more restrictions. With a retirement account, for example, you may be sacrificing access to this money until you reach retirement age—but this limited access can come with additional benefits, especially as it relates to taxes.
Investments into a tax-deferred account can even reduce the amount of taxes you’ll have to pay on next year’s tax bill.
4. Cover important expenses, such as home improvement costs.
Have you been struggling to save for upcoming home maintenance and repairs? A tax refund may be the springboard you need to afford these projects, whether it is an air conditioner replacement, paint job, or other household need.
With the time for spring cleaning and yard maintenance fast approaching, your tax refund may be the perfect way to green-light these projects without worrying over their cost.
5. Fund education or other professional training.
Eager to improve your professional prospects and increase your earning potential? Through educational opportunities, professional development, or other forms of training, your tax refund might give you the experience required to take the next step in your career.
Some of these educational costs may also be tax-deductible when next year’s filing deadline rolls around, which can reduce your overall tax burden.
Although many consumers think of taxes as nothing more than an obligation to the government, the tax planning and filing process can actually improve your financial outlook when you take advantage of tax breaks, maximize your tax refund, and find financially savvy ways to put that refund to good use.
Discover more tax-related tips through our guide, Tax Planning 101: The Beginner’s Guide for Individuals.