How to Maximize Your Tax Refund
If you're expecting a tax refund this year, you might be tempted to spend it all on a tropical getaway, or toward a new piece of tech that you've had your eye on.
The average tax refund is $3,163 — which for many is the largest chunk of cash they'll receive during the year. What are some strategies you can use to make that money last and help improve your finances?
Here are a few ideas on how to maximize your tax refund:
Spend Part of It and Save the Rest
If given a choice, many of us would rather enjoy the here and now instead of focusing on a long-term goal. Human nature is inclined to favor instant gratification over a faraway gain. But your future self would benefit the most by putting a portion of your tax refund into a savings account. Make a pact to only spend a small portion of it, then put the remainder into savings to make it last longer. This way, you'll balance your desire to have some fun today with your overall financial well-being.
Put It Toward an Emergency Fund
If you need urgent dental work, a major car repair, or if you find yourself out of work, your emergency fund will provide the financial cushion you need should an unexpected expense arise. While it's recommended to keep six months of your living expenses tucked away, sometimes that can be challenging. Your tax refund check is an easy way to significantly bolster your emergency fund.
Pay off Debt
Consider using funds from overpaying on your taxes to make headway on paying off your debt. In turn, you'll be able to save money on interest fees, and feel as if a burden has been lifted off of your shoulders. Not sure where to start? First off, be sure that you know where all of your debt is, the total amounts, and the interest rates. Then, focus on any high-interest debt first, such as credit cards.
Save for a Major Goal
If you and your family have plans to buy your first home, grow your family, or buy a new car, using your tax refund is a great way to get a boost on these goals. Saving money for a major purchase means that you'll take less out — in turn, saving you on interest fees. Plus, the shorter the loan term, the faster you'll be able to pay off any loans and free up cash for your other goals.
Receive Your Refund via Direct Deposit
Eight out of 10 taxpayers receive their refund by having it deposited directly into their checking or savings accounts. It's quick, easy, and you'll most likely be less tempted to squander it. If you receive your return via check, you run the risk of spending it. Remember that money you don't see is money you won't spend.
Consider Adjusting Your Paycheck Tax Withholding
If you're typically short on cash during the year, consider adjusting your withholding so that you can keep more money in your bank account. The money you get each month could really help you cover your bills and free you from financial stress all year long.
Whatever you plan on doing with your tax refund, deciding what you want to do before you receive your money will help you maximize your tax refund and do what's best for your finances.
