Your tax return may be smaller than usual this year, but that doesn’t mean you can’t stretch it to help you meet your goals. Setting a small amount of money aside can have a huge impact on your financial health in the short or long term.
In this post, we’ll outline a few strategies for stashing the extra cash you may be getting this time of year. The secret? No matter how much you get back this year, it’s the act of saving that matters most.
Save for a rainy day in your emergency fund
You can’t go wrong adding to your emergency fund. If you don’t have one yet, there’s no better time to start. Health costs sneak up. Cars break down. Anything you can stash away for a rainy day will be welcome should that day come.
There are many reasons to have an emergency fund: you never know when you may need a little extra cash. While it may be tempting to spend the refund dollars burning a hole in your pocket, patience will reward you.
If your employer sponsors a short-term savings plan, this may be a great account to designate as your emergency fund, and a fine place to deposit your tax refund.
Put it toward retirement
If you already have a retirement fund, add your tax return – whatever the size – to this pot. The miracle of compound interest will help you grow this money over time without lifting a finger.
If you don’t have any urgent financial needs or another long-term goal in mind, your retirement fund is one of the most secure places to save extra money.
In the event that you don’t have retirement account yet, maybe now is the time to open one. Not sure where to start? Here’s a list of the best free retirement accounts available in 2019 to help.
Contribute to your kid’s education fund (or some other long-term goal)
Whether you have one child or a few, consider setting money aside for their education, if you haven’t already. There are several types of savings plans out there, and you should research your options before deciding which is best for you.
If you don’t have a family or if your children are already past their educations, consider your long-term goals.
Whether you’re saving up for a down payment on a car or a house, your tax return is a great opportunity to take a step back and assess whether or not you’re financially ready to move forward with that investment.
Pay off some credit card debt
Spending your tax return to reduce the amount of interest you’ll pay on a credit card is a fantastic use of this money. And it will make you feel a little freer knowing you’ve chipped some rock off the mountain.
The average American’s personal credit card debt varies by age, income, and state, but in any circumstances, it’s not easy to manage once you begin to carry a balance. Working on paying down your credit card debt will feel good and help you move toward having a better credit score.
Pay down your loans
In the class of 2018, 69 percent of college students took out student loans. This high percentage is nothing new, and student debt can feel like a huge burden. But it doesn’t have to.
The trick is to make a reasonable plan. You can and will pay them off if you start chipping away at your student loans, month by month. This year, even if it’s more modest than usual, your tax return can help.
If you’re lucky enough to be without student debt, you may have a mortgage or a car payment to make this month. The same thinking applies: use your tax refund to make progress on paying back your loans, and get ahead on the next month if you can.
Invest in (small) home improvements
If you’re a property owner, you know that making improvements to your home can add value. There are a few things you can do that are impactful but don’t cost an arm and a leg. For example, while renovating your kitchen would be expensive, repainting the walls and cabinets may be within reach.
The trick to home improvements is to think long-term: if your patio lacks shade, put your tax return toward buying a healthy sapling and planting it before the summer heat arrives. This may sound like a superficial change, but it can make a huge difference a few years down the line.
Make a to-do list (or drag last year’s list out of the drawer), and consider what you’re most excited about checking off. If you are anxious to pay a bill or to pay off a loan, that’s a great target for your tax return funds this year.
If you still find yourself staring down a big goal like buying a new home, maybe your tax return is the seed you need to start saving.
Tax returns can feel like “free money,” but it may be more helpful to think of this as the money you would’ve been able to direct toward the things you care about had it come in with your paycheck. Use this season as an opportunity to spend or save wisely.