Tax refund season is probably one of the most “looking forward to” seasons besides Christmas or any other holiday that you might enjoy. I mean…who doesn’t like getting some money back from the IRS at the beginning of the year? Of course, not everyone is fortunate, but for those who are, you have some extra-unexpected cash that needs to be put to use. Putting it to use doesn’t mean to go ball out at the mall and buy new shoes, clothes, and accessories. What it means is to review your current financial situation and see where you can reduce your debt and increase your wealth. You should always be thinking about taking the “extra” cash and using it to work to your advantage.
If you aren’t sure what you should be doing with your tax refund. Here are 3 smart things you can do with your tax refund.
PAY OFF YOUR CREDIT CARDS
From impulsive buying to purchasing household essentials, your debt is sitting and accumulating interest. If you’ve been paying the minimum it’s likely that you barely have made a dent in your debt. In fact, you’re scraping the surface and telling yourself the minimum is suffice. Paying the minimum is not enough and you know it. Until you make the decision to pay off the card, it’s going to be that nagging thing in the back of your mind that you have to pay.
It’s simple, don’t think twice. Take advantage of your tax refund and pay off your high-interest credit cards. If you can’t pay the whole thing, pay some, then create a plan to pay it down within a short period of time. Visualize no longer having to watch interest accrue. It’s a great feeling, trust me! If you want to quickly figure out when you will be credit card debt-free, here is a free online calculator you can use from Bankrate that will do the math for you.
BUILD YOUR EMERGENCY FUND
If you don’t have an emergency fund this is the perfect time to start building one. After all, you do have extra of cash coming your way right? An emergency fund is for when “life” happens. For example, if your car breaks down or you have a school expense or an emergency ticket you have to purchase because of an urgent family issue this is where you go. The emergency fund is NOT for Beyoncé Concert tickets or when you decide you “deserve” a shopping spree.
An emergency fund is something you build over time because it encompasses 3-6 months of your essential living expenses. Essential living expenses are your month-to-month expenses that you need to survive. This includes your rent, food expenses, insurance, car note, electricity, cell phone bill and more. You decide what is essential then multiply it by 3 or 6, which is the total amount you should aim to put in your emergency fund.
The amount may look scary at first, but you don’t have to fund it all at once. Start off with funding your emergency fund with $1,000 as a buffer and build from there. Before you know it your emergency fund will be stacked. Of course, you have to create a plan and continue to pour funds into it. Act now and put your tax refund into a separate emergency fund account. You will definitely reap the benefits later. If you are looking for more information on emergency funds, check out my blog post on how to get your emergency fund started.
PREPAY YOUR VACATION
Let’s be completely honest here because we all love taking vacations. Instead of talking you out of taking one I’m going to encourage you to do it. However, it’s important for you to have a balance between your financial goals and play. Instead of putting your vacation on your credit card opt for using a part of your tax refund to prepay your vacation.
If you don’t have a vacation planned as of yet, this is a perfect opportunity to use your tax refund as well. Open up a separate savings account and put in a percentage that you feel comfortable with. The purpose of creating a separate vacation fund account is to use cash instead of using borrowed money aka a credit card. No more telling yourself “I will pay it back later.” Your goal is to build wealth and get out of a vicious debt cycle, remember?
These are only some of many things you can do with your tax refund. Understanding your financial standing is crucial when you have financial goals you want to meet. It’s not about being strict 100% of the time, but prioritizing debt reduction because it should always be on the top of your list. While most see tax season as an opportunity to spend, you should see it as an opportunity to improve your overall financial wellbeing.
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