As many of us begin to receive our income tax return, it’s important to give some thought on how to use it wisely. For example, your tax refund could be used to create an emergency fund, or to pay off / down any outstanding debts. For those affected by the government shutdown can attest, it’s critical to have money set aside for these types of unexpected situations.
Here are a few tips on how you can make the most out of your tax return.
- Save for an emergency. According to the American Bankers Association, roughly 40% of Americans are able to cover a $400 emergency expense. However, you can better prepare for the unexpected by opening or adding to a savings account that serves as an “emergency fund.” It should contain up to six months of living expenses in the event of an unexpected financial hardship.
- Pay down debt. Try to reduce existing balances either by making higher payments on loans or credit cards with high interest rates or pay off smaller debts first.
- Save for retirement. Having the retirement of your dreams takes careful planning. Open or increase contributions to a tax-deferred savings plan, such as a 401k or an IRA. A bank can assist with setting up an IRA and your employer can provide guidance on establishing or increasing your contribution into a 401k plan.
- Invest in your child’s education. Look into opening a tax-advantaged 529 or UTMA/UGMA account to save for your child’s education. There are many advantages to each type of plan. A wealth management advisor can provide guidance based upon your situation.
- Set aside money for future medical expenses. You can also take advantage of paying for medical expenses with tax-free money by setting up either a Flexible Spending Account or Health Savings Account. The latter can be used to offset medical expenses in retirement as the money builds over time, unlike an FSA account.
- Pay down your mortgage or student loans. Make an extra payment on your mortgage or student loans each year to save money on interest, while reducing the term of your loans.
- Invest in your home. Use some of your tax return to make improvements to your home that will add to the value of your home over the long-term. This can include small, cost-effective upgrades such as energy-efficient appliances.
- Donate to a charity. Giving a donation to a charity provides two benefits: 1) It makes a difference in your community, and 2) You can claim it as a tax deduction on your 2019 tax return, if you itemize.
While there are many ways you can take advantage of your tax refund, the most important thing to keep in mind is to save for the unexpected. You may never know when a financial hardship will arise, therefore, it’s best to be prepared.
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