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How to use your Tax Refund?

Every time you receive your tax refunds, you might get really excited about how you would use it. However, there are better ways to use these refunds than spend them all.

1. Emergency Fund – According to experts’ recommendations, it is better to have a rainy-day fund worth three to six months of your expenses. If you have a fund with lower savings than that, it would be best to use your tax refunds and fund your emergency fund. More than 50% of the Americans have less than three months' worth of emergency funds, and a quarter have none. Having a normal savings account can generally help you with your emergency savings and keeping them safe. However, it is always better to have a Certificate of Deposit (CD) as it gives you a better rate of interest. The only point you need to keep in mind before investing in CDs are that you cannot take it out before the date of its maturity.

2. Retirement contributions – You could consider making contributions to your Individual Retirement Account. This would be the best way to save for your retirement. It would be good to consider if you would like to invest in your Roth or Traditional IRA. In case of a traditional IRA, the amount is deducted from your salary, and you end up paying taxes when you take the distributions. In case of a Roth IRA, you pay the taxes on the money before contributing to the IRA. In this way, when you start taking the distributions, you do not need to pay any taxes on them. This would help in saving for your retirement. According to experts, you must have at least 10 times your salary saved for your retirement by the time you turn 67.

3. Credit Card debt payment – You could use your tax refunds to pay your credit card bills. You must make it a point to pay your credit card debts as they charge you a high interest rate and can keep you in debt for years. Credit card debts are also known as ‘bad debt’ because, unlike mortgage and student loans, they do not pay for appreciating assets.

4. Education investments – It would be a great idea to accumulate your funds towards your child’s or your own education. Education helps in improving your salary potential, social mobility, sense of fulfilment, and even health. Additionally, if your tax returns are going into your college savings fund, you might possibly get some tax benefits as well.

5. Home Value Increment – After you have saved enough for your emergency funds and education and paid all your debts, it would be a good idea to renovate your home and invest in it. You could focus on improving the quality of your and your family’s living.

6. Charity Donations – Essentially, you could start donating your tax refunds to charities. This would not only help your tax benefits, but also, make you feel emotionally rewarding.

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