Spending a tax refund on a one-time splurge is fun. Using a tax refund to get ahead financially is wise.
Start or Increase an Emergency Fund
Sixty percent of Americans don’t have enough savings to take care of a $1,000 emergency. An emergency fund can provide the freedom to handle unexpected circumstances without borrowing money. Since an emergency fund should be large enough to cover three to six months of living expenses, the average $3,000 tax refund would go a long way toward that goal. An emergency fund needs to be easily accessible yet in a separate account from the one for everyday expenses. Many people choose to keep their emergency fund in a high-interest savings account. Consumers should shop around for the best savings account yield, however, online savings accounts tend to have higher interest rates.
Pay Off High-Interest Debt
Getting single-digit returns on a savings account may not make sense if you also have debt with double-digit interest rates. How much money would be saved by putting a tax refund toward high-interest debt depends on the amount owed and the debtor’s interest rate. An online repayment calculator can illustrate how much would be saved. Credit card debt, private student loans, payday loans, and title loans are candidates for paying down with your tax refund. Borrowers need to contact the lender to make arrangements for the lump sum payment to go toward the loan’s principal.
Make Home Improvements
Many home improvements have the potential to lower utility bills. That’s why using a tax refund for money-saving home improvements is a smart move. Unfortunately, finding money-saving home improvements is not always as obvious as repairing a leaky faucet to lower the water bill. Old appliances may still be functional but tend to use far more energy than new energy-efficient models. Replacing those older appliances could lower your utility bills. Replacing drafty windows and upgrading insulation make homes more comfortable and can save money on heating and cooling bills.
Take Care of Yourself
Getting ahead financially is of little value when healthcare needs haven’t been met. Typically, eye exams, eyeglasses, or dental work are what’s been neglected. Some health insurance plans don’t cover those services or provide very limited coverage. Investing in yourself may be the wisest investment of all.