If you’re expecting a tax refund this year, then good for you. These aren’t guaranteed, so we don’t blame you for any positive vibes. As for what you’ll do with it, you could use the refund to make a celebratory purchase, or you may want to hold off because this “free money” could be a way to make headway -- and maybe even put a dent -- in some financial goals.
What kind of goals are we talking about? We’re talking about financial goals that tend to get pushed aside because of other more immediate needs.
We’ve written about emergency funds here because unexpected expenses can derail the best financial plans. If you have money already set aside, an emergency fund may give you some breathing room.
Why now? Far too many people – about 40% of Americans – aren’t able to cover a $400 emergency expense out of pocket. And that $400 (which can be a blown tire or major appliance) represents just a fraction of the six months of expenses experts say everyone should have in an emergency fund.
Saving money now to use decades later may feel like a low priority, but if retiring in comfort means saving while you’re earning money, not after.
Why now? If you’ve got a retirement account, like a Roth IRA, or are looking to start one, your unspent refund could be a great opportunity to get closer to the annual contribution limit.
If retirement is ‘covered’ or your immediate goal is to keep your money in a separate account for a to-be-determined-purpose (New car? New computer?), savings accounts could be good option. High APYs are great. Also check for things like minimum balances, fees and whether the accounts you’re considering provide the flexibility you need.
Why now? Compound interest is the savings version of “rest and vest.” You deposit money, the interest it earns gets added to the balance you’re earning interest on and you make even more interest. If you don’t need immediate access to your refund, consider a certificate of deposit, which can have a higher APY than other accounts, or check out high-yield online savings accounts.
Paying down debt can be a great move, and if you’re one of the many who are carrying a portion of the country’s $870 billion in credit card debt, your refund could be an opportunity to put a dent in it.
Why now? Paying down debt lets you put it behind you. If you can use your refund to get ahead you may be able to pay less interest (which means save money) in the long run.