Every year tax time rolls around shorty after New Year’s. Most people are anxiously waiting to get their tax refunds to splurge on new toys that they most likely don’t need. I thought that I would list a few smarter alternatives.
- Start an emergency fund. An emergency fund is nice to have to cover those unforeseen expenses i.e. car repair, pet medical emergency, etc. Dave Ramsey recommends $1K as a starting point. I have my emergency fund in an Ally savings account. I also have a recurring deposit scheduled every paycheck into that account. So as long as I don’t have to borrow money from it, it will keep growing.
- Put the money towards debt. Personally, I am using my tax refund to pay down some of my student loan debt. There isn’t a savings account that will give you more than the 5-6% interest that you are paying on your student loans. It doesn’t make sense to have a large amount of money sitting in a savings account collecting little interest when you are paying 6% interest on your student loans every month. Not to mention credit card interest rates that can be over 20%. Pay those down before student loans.
- Invest in education. Use your refund to start taking classes towards a degree or certification. One can only cut so many expenses. Eventually you will need to increase your income in order to have more money to invest towards your future goals. A degree or certification can give you the extra edge you need to get a raise or a better paying job.
- Save towards a down payment. Use your refund to jumpstart a down payment for a house or real estate investment. Ideally you will want to have a down payment of 20% saved before purchasing a home, so every bit will help.
- Invest in an IRA. An IRA is another vehicle in which to save towards retirement. Vanguard requires a minimum investment of $1K to open an IRA account. I opened one last year with them and I am on track to max it out this year.
Any one of these options are better than blowing your refund on a new TV, smartphone, vacation etc. Also if your tax refund is rather large than you should adjust the withholdings on your W-4 so that you get to keep more of your money throughout the year.