Were you astonished to discover that Uncle Sam planned to present you with a considerable tax refund? Or did you anticipate this all along? Regardless, what strategies do you have for your tax refund now that it has arrived?
For many Americans, the initial urge is to splurge on a Vegas vacation or a shopping spree at the local mall. Both choices, while exciting, typically lead to a rapid depletion of funds with little to show for it.
If you’re on the road to financial independence, a lump sum such as a tax refund could greatly accelerate the pace at which you settle debts, compile an emergency reserve, and devise a robust financial strategy.
According to the Internal Revenue Service, most Americans are eligible for a tax refund, with the average refund amounting to about $2,913. That’s a substantial sum! So, how should you ideally utilize your tax refund?
Set Aside an Emergency Reserve
If you’ve been endeavoring to eliminate your debts but haven’t yet managed to fully accumulate a $1,000 emergency reserve, your tax refund provides the perfect opportunity. The intended use of an emergency fund is not to offset overspending in a given month – it’s strictly reserved for real emergencies, such as sudden car repairs or unexpected vet bills. It should only be used in extremely pressing situations, like when rent is due, and not for indulgent purchases.
To resist the lure of having a large sum readily available in your checking account, consider relocating your emergency fund to a different bank from your regular one, preferably an online bank. It usually offers slightly better interest rates than traditional banks, and the 2-3 day transfer period can help curb impulse spending.
Settle Outstanding Debts
After establishing your $1,000 emergency fund, you still likely have a sizeable portion left over, which could be directed towards settling any remaining debts. It may be more encouraging to start by clearing the smaller balances first, or you might be more inclined to reduce the largest and most daunting debt. Whichever approach works for you, making a substantial payment will be an incredible motivator on your journey towards financial freedom.
Enjoy a Little
Regardless of your financial status, maintaining a healthy balance is crucial, and this includes occasionally treating yourself. If your finances are still on shaky ground, consider allocating a modest percentage, say 2% of your tax refund, for guilt-free leisure spending. If you’re more financially secure, you could afford to use more for recreational activities.
Alternatives for Spending Your Tax Refund
If you have already filled your emergency fund, managed all your debts, and accumulated a six-month emergency reserve, you could apply your tax refund towards one of your long-term goals, such as saving for a house deposit, planning a vacation, or maxing out your retirement contributions. Remember, it’s excellent to prioritize financial responsibility, but also important to allow for a little enjoyment.
