The tax deadline was pushed back to July this year which means many people have just received their tax refund. According to the IRS, the average refund issued as of July 3 was $2,762. With the financial strain caused by the pandemic, many people will be using their refund to pay essential bills. If you’re fortunate enough to have your necessary expenses covered, here are a few financially smart ways to spend your tax refund.
Pay Down Debt
You probably don’t want to see your entire refund go straight to your credit card bill, but you don’t have to take the all-or-nothing approach. Consider putting 20% of your tax refund towards paying down high-interest debt you may have. Adjust this number as you see fit, but you’ll be doing yourself a favor by paying off a large chunk at once. You’ll save a ton on interest and you’ll be finished with this debt a lot sooner than you’d planned.
Start or Contribute to an Emergency Fund
If you still have your job now, there’s no guarantee that won’t change in the future. More than ever, we’re seeing the importance of having money saved up for emergencies. Try saving enough in your emergency fund to cover three to six months of living expenses.
Save for Health Care Expenses
If you have a high-deductible health insurance plan, you can start saving money in a Health Savings Account (HSA). An HSA is a tax-advantaged savings account you can use for qualified medical expenses, such as prescriptions and co-pays. Putting your tax refund into an HSA is a great way to boost your saving potential for medical expenses.
Upgrade Your Home Office
More and more people are working from home due to the pandemic. If you’re home office space needs a little upgrade, your tax refund could be used to buy a more comfortable office chair or desk.
Invest in Your Future
An Individual Retirement Account (IRA) can help you put money away for your retirement years. You can make contributions to a Traditional IRA that can be taken as tax deductions in the tax year they’re made. Both contributions and earnings are tax-deferred until the funds are withdrawn.
Contributions to a Roth IRA are taxed as income in the year they’re deposited. At the time of withdrawal, the earnings are not taxable. Putting your tax refund into either type of IRA is a smart move.
Donate to Charity
Use your tax refund as an opportunity to give back to your community in ways you might not be able to afford throughout the year. Plus, it will give you a head start on potential deductions for next year if you plan to itemize.
However you choose to spend your refund, consider all of your options carefully before making your decision and you won’t have any regrets.