Are you expecting a tax refund to come your family’s way this spring? Cheers! You can’t complain about having a little extra cash lining your pockets.
You probably already have grand plans for this sudden boost to your budget, spending it quickly on gadgets or a Spring Break vacation. But these treats may not be the wisest use of your money.
Check out the list below to find financially responsible ways to use your tax refund.
1. Pay off a Personal Loan or Line of Credit
There comes a time in every family’s life when you need to borrow money. Maybe your car breaks down unexpectedly, and you’ve already tapped out the auto fund for the year. Or perhaps, one of your kids needs to see a doctor.
A personal loan or line of credit is an easy way to borrow money fast when you need it. These financial products make up your budget’s shortfall during a financial emergency, and the process of requesting a loan can be fast.
But eventually, there will come a time when you need to pay it back, plus interest and fees.
You can speed up this timeline by sinking your tax refund into your personal loan or line of credit. Don’t worry if it doesn’t wipe out what you owe entirely. Any reduction in your balance may reduce what you pay in interest and other fees.
2. Create an Emergency Fund
Why do you turn to a personal loan or line of credit in an unexpected emergency? Because you don’t have an emergency fund to tackle these expenses on your own.
An emergency fund is a short-term savings account that you can tap into whenever something goes wrong — whether it’s an unexpected repair or medical bill.
How much do you need stockpiled in this account? The common rule of thumb is saving between three to six months’ worth of living expenses.
But you may want to bump up your goal depending on your living situation.
If you or your partner work in a volatile job that has fluctuating hours or the possibility of a furlough, you may want to have more.
An emergency fund of any size may be daunting when you’re starting from scratch. But when last year’s average tax refund was nearly $3,000, it may be a quick and simple way to get started.
3. Start Investing in Your Children’s Future
Raising a family doesn’t come cheap nowadays. The average child costs more than $233,000 by the time they’re ready for college, and this sum doesn’t even include their tuition.
Every year, the cost to go to college goes up at an average of 6 percent each year. If nothing changes this inflation, CNBC predicts it would cost nearly $500,000 to complete a four-year degree 18 years from now.
Are you ready to help your kids with that kind of bill?
You may be able to get them started on the right foot if you invest your tax refund (and future refunds to come) into a 529 plan. This tax-advantaged savings plan earn higher interest than the typical savings account.
What Will You Choose?
A tax refund will come in handy this spring. It doesn’t matter if you’re expecting a big check or you’re only getting a little back. Any amount can make an impact on your future.
Consider your options carefully and choose the one the speaks to you the most. Or, if you have enough to go around, split your refund evenly between all three goals.