Woo!! For some, tax season is the best time of the year. Sure, it’s tedious to file that pesky tax return but getting that magical refund makes it all worth it. If you’re one of the many individuals who will receive a tax refund this season, consider doing something meaningful with that money this year.
Some ideas of how to maximize your return?
Contribute to Your Emergency Fund
If you don’t already have at least 3-6 months of your income stashed away in an Emergency Fund, park a significant amount of your refund here. Murphy’s Law is an unfortunate reality in life, and staying prepared is critical. Sure, it’s tempting to splurge all of your refund on a fun trip or new toy for your home, but those things won’t protect you should the worst happen.
Chip Away at High Interest Debt
Most of us have debt: credit card, student loans, home equity loans, auto payments, etc. If you’ve already got a steady Emergency fund started, allocate part of your refund toward paying off the debt carrying the highest interest rate. Not sure what your interest rates are? Contact your creditors and get informed. Those high-interest rates have a way of creeping up on us and adding up over time. Get ahead with this year’s tax refund.
Maximize Contributions to Retirement Accounts (Roth IRA, 401(k), or Traditional IRA
If you have your debts under control, now’s the time to increase those contributions to your retirement accounts. If you have a traditional IRA or a Roth, you are eligible to contribute up to $6,000/year to these accounts (as long as you have earned income) for the tax year 2020 (IRA limits for tax year 2020 are $6,000/year for those under 50 – $7,000 for those over 50). A contribution to your retirement account can be very responsible – it’s a gift for “future you” and your financial goals.
Open an Investment Account
You may already know that investment accounts are a great way to help your finances keep pace with inflation. This year, take a portion of your refund and create an investment plan with the help of a financial advisor. Depending on your risk tolerance and financial goals, your advisor will assist you in developing a strategic plan for optimizing your investments.
Treat Yo Self…within reason
Feeling fairly settled financially? Good for you! Using your refund towards the purchase of something fun can be a great way to reward yourself for responsibly managing your finances. That said, avoid the temptation of using your refund as an excuse to spend even more money. For example, don’t let your $2,000 refund turn into a $4,000 credit card bill!
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