Getting a tax return mailed or transferred directly into your account is exciting. And although it’s easy to let that excitement lead you to thinking about which fun items you'd like to buy and trips you want to take, a tax return can put you in a better financial position for the future if used responsibly.
If you’re interested in learning how to be financially responsible with your income tax return, consider the following information to be along the lines of “start studying a week before the exam, not the night before” advice. Let’s dive in.
1. Pay Off Existing Debt
First thing’s first: Pay off any high-interest debt with your tax return. It’s one of the best investments you can make with the extra cash. Usually, high-interest debt comes from credit cards that have high interest rates which compound month after month.
According to a report from the National Taxpayer Advocate, the average tax refund in 2020 clocked in at $2,827. With an average of $5,315 in credit card debt in the same year, a tax refund can take a big chunk off the debt, but not the entire amount. If you’re in this boat, there’s no need to worry.
To knock out the remaining balance on your credit card, you have a few options for avoiding high interest rates. You might consider:
- Rolling over any remaining debt to a balance transfer credit card that has a lower interest rate
- Applying for a lower-interest debt consolidation loan
If your debt situation is likely to be the same in the following years, you might want to consider adjusting your withholding so that you have access to the withheld money to pay the debt down. Consider including other lower-interest debts as well, including student loans and mortgage.
2. Invest in Your Future
It’s never too soon to start thinking about your future and the future of your family. Consider using your income tax return in these future-focused ways:
Contribute to Retirement
Whether you have a Roth, traditional IRA, or 401(k), use your extra funds to augment your retirement account for when you’re no longer on the job. Once you’re at that point, you will be grateful that you chose to make the long-term investment toward retirement rather than spending it on something you will have forgotten about.
Open an IRA for Your Kids
If you have kids, consider investing in their retirement as well. With the power of compounded interest, contributing to an IRA at an early age is a great approach to funding their golden years. If your child is at an age where they can work, they can contribute up to $6,000 annually as long as they make that much earned income. Better yet, you can be the one funding the account as long as they are the one to have earned the income.
Start a College Fund
If your children are very young, opening a college fund can save them a significant amount of money, especially considering the cost of higher education these days. Setting up a 529 plan will help to curb the costs and debt from student loans.
3. Save for Peace of Mind
The unexpected can happen. Whether it’s a natural disaster that floods a basement or an alignment on your car, you need to have the cash on hand to pay for it. You might also run into a sudden job loss or cut in work hours. When this happens, you should have enough in your emergency fund to cover 3-6 months of required living expenses.
If you already have an emergency fund, consider saving for other events that you plan to pay for in the future, such as a home improvement project or an anniversary trip.
4. Invest In “Human Capital”
Compared to any other asset you own, you are the most important, so invest in yourself!
Use your tax refund to pay for:
- Additional training or education by taking a certification or college course relevant to your career
- Attend a conference in your industry
- Pay for a membership to a professional organization related to your profession
An investment in your professional life will pay off for years to come by way of greater job stability and bigger paychecks.
Start a Side Business
A side business that highlights and capitalizes off of one of your talents is another way of contributing to your human capital. Maybe you are a talented nature illustrator or a woodworker and you’d like to sell your products on the side.
Use your tax refund as seed money to purchase the raw materials or design a website that features your online store. Not only will you be able to capitalize on something you love to do, but also that extra income can be used as investment toward your future.
Get Financially Responsible with Crews Bank
Knowing what to do with your money isn’t always easy. By banking with one of Crews Banking Corporation’s banks, you have access to personal banking, borrowing, investment management services, and trust services. Plus, if you’re ready to take the leap into owning your own business, we provide business banking as well.
Our team at Crews Banking Corporation is ready to help you learn how to be financially responsible. Contact us today!