The season of love is upon us. No, not Valentine’s Day…we’re talking about tax season!
If you’re among the approximately 76%1 percent of Americans who expect to receive a tax refund, this time of year can feel like Christmas.
The looming question is, however, what to do with your refund?
To help you out, we’ve created a list of the best things you can do with your tax refund. These ideas will help set you up for future financial success and stability. They may not be flashy and exciting, but there’s nothing quite as rewarding as going to sleep at night in your own home without excessive debt hanging over your head.
Top 5 Best Ways to Use Your Tax Refund
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Create an Emergency Fund.
Most experts recommend having enough cash in savings to cover at least three to six months of expenses.
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Pay Down Debt.
It may not be exciting, but we promise you that you’ll breathe a large sigh of relief as you see your balances decrease. If you’re trying to improve your credit score, paying down debt is one of the best things you can do.
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Save Toward a Down Payment.
If you’re currently renting, living at home with your parents, or couch surfing, saving for a down payment is a great use of your tax return! Studies show that homeowners’ wealth is 40 times higher than that of renters2. Saving for a down payment is an investment in yourself and your future wealth.
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Make Extra Payments on Your Mortgage.
If you have a 30-year mortgage, did you know that making just one extra mortgage payment every year can shorten your loan payoff by approximately four to five years? Not only can you pay your home off faster, but it also saves you money on interest payments! You can enter your information here to calculate your savings.
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Save for Retirement.
Let’s say you’re a homeowner, you have an emergency fund, and don’t have any debt. CONGRATULATIONS! You are doing things right. In that case, might we recommend having a little bit of fun with your return, and putting the rest toward retirement? If you’re under the age of 50, you may contribute up to $7,000 toward a traditional or Roth IRA. If you’re older than 50, that amount can increase to $8,000.
Ok, we couldn’t wrap this up without sharing some of the worst ways you can use your tax return! We’re not judging; it’s your money and you can do what you want with it. But if you’re not financially stable, we would recommend holding off on these splurges for a couple of years until you’re in a better place.
Top 3 Worst Ways to Use Your Tax Return (If You’re not Financially Stable)
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Experiences such as Concerts and Vacations.
Memories last a lifetime! But so does debt. And we promise you, you’ll enjoy that T. Swift concert or that Disneyworld trip much more if you’re not feeling guilty about the other things that you should’ve done with your money. (Ok Swifties…you’ll probably enjoy the concert either way…)
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Luxury Purchases.
Remember, your tax return isn’t free money. It’s YOUR money that you loaned to the government. Don’t make purchases that don’t fit into your everyday budget.
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Going in Without a Plan.
Whatever you choose to do, one of the worst things you can do with your tax return is to not have a plan for it! Even if fun is your objective, be strategic and develop a spending plan.
If you’ve been dreaming of owning a home, your KTL loan officer would love to help you develop a plan for your tax return! They’ll review your information and let you know how to best use your return to get you closer to your goal of homeownership. Schedule a homebuyer consultation today!
1https://www.cnet.com/personal-finance/taxes/how-big-is-the-average-tax-refund-in-your-state/
