For many, it may be hard to practice restraint when you get a nice windfall of cash like your tax refund.
Before you spend it on something you may regret later, consider these 3 strategic ways to allocate your tax refund that will help you stay on that path to financial independence:
#1: Emergency Savings
If 2020 has taught us anything, it’s that the bottom could fall out from under us at any given moment. This pandemic has reinforced the importance – and urgency – of building and maintaining an ‘oh sh*t fund.’ You want to be as prepared for small and large emergencies as much as you can, from needing to pay for new tires to larger expenses such as keeping up with your mortgage because you lost your job. Ideally, sustain at least 6 months’ worth of fixed expenses in a high interest savings account.
#2: Pay down retail debt (i.e. credit cards, store cards, furniture, auto loans, etc.).
If you have retail debt that bears double-digit interest rates (i.e. 10% or more), then apply the tax refund towards the principal to accelerate your debt repayment.
#3: Catch up on your long-term goals.
If you’ve been “behind” on saving towards long term goals such as retirement, buying a home, college for your kids, or any other goal that has a timeline of longer than 5 years, consider contributing to those accounts where you’re earmarking funds for those particular goals.
For example, if you haven’t maxed out your IRA, contribute up to $6,000 for the year or as close to that as possible.
THE BOTTOM LINE:
There are 3 ways to use your tax refund to get ahead:
Build or bulk up your emergency savings
Pay down high interest debt
Catch up on your long term goals.
Future You will thank you for this.