Every year, most people can expect to receive a tax refund when they file their taxes. Though some don’t like giving the IRS an interest free loan, getting a good sized check is often celebrated by many. Before you go spend it all on impulse though, here are some ideas of how to use it to improve your finances long-term.
Debt Elimination
One of the best ways to make use of a substantial amount of money you haven’t budgeted for is to get ahead on your mortgage, car loans, credit card balances, and student loans. By making even a few extra payments, you can eliminate hundreds of dollars in interest you would be paying if you consistently made only the minimum payments. Sure, it’s not the most fun way to use a large chunk of money, but it’s definitely a good step to reaching more financial freedom in the long run. Debt drags you down, so do your best to eliminate debt.
Investment Options
If your debt is under control and you’ve always wanted to start a personal retirement account, invest in the stock market, or set up a fund for your children’s higher education costs, an income tax refund is a great way to get a jump start. Many banks and financial institutions offer these types of accounts, so check with your bank to see what is available before you consider other options. Some institutions require large minimum initial investments, while others allow you to open an account with as little as a few hundred dollars.
Another investment option is an emergency fund. While it won’t be earning huge returns, it could be a life saver in times of crisis.
IRAs
Setting up an IRA is a wise financial step in an uncertain economy and the questionable future of Social Security. You are never too young to start an IRA, and the sooner you start saving, the greater your potential payout when you reach the maturity of your investment. The usual minimum amount to open an IRA is between $1,000 to $3,000. There are, of course, guidelines which must be followed, depending on which type of IRA you choose – Roth or traditional. Funds which go into an IRA are non-taxed or tax-deferred, but there are heavy tax penalties if you remove them before you reach retirement age.
ESAs
Another great idea if you have children is starting an ESA, or an Educational Savings Account. College becomes increasingly expensive every year, while remaining important to your child’s career opportunities. ESAs allow tax-free contributions which must be used for tuition and related educational expenses. Coverdell ESAs allow a maximum of $2,000 per child per year, while 529 plans, another type of ESA, have no maximum yearly contribution limit. There are other variations between these two types, so do your research to decide which one is right for your child.
As you prepare your taxes, consider carefully what to do with your expected refund. Instead of spending your tax refund on clothes, furniture, electronics and other immediate wants this tax season, make a plan for stable finances in the future by eliminating bad debt or investing in your and your children’s future.
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