Discovering that you’ll be getting a tax refund is certainly not the worst news you’ve had in your life. In fact, it’s easy to see a tax refund as some kind of gift from the universe.
But here’s the truth: A tax refund isn’t a gift—it’s part of every paycheck you should have been getting all along. You overpaid your taxes. Plan now for how you’ll manage that check or your tax refund could evaporate into thin air. You have options—at least five that follow.
The decision you make for what to do with that check could either make things worse or it could make your life so much better. Choose well.
1. Create an emergency fund
It’s easy. Take the check to your bank and use it to open a savings account. Then walk away and leave it alone, knowing that you have a fallback if something serious and unexpected happens that you absolutely cannot cover with your regular income. You might lose your job and need to keep food on the table and the bills paid for a few weeks while you make the transition. You may lose a friend or relative five states away and the trip is more than you can handle without going int0 debt.
How it makes your life better. Having an emergency fund eases the stress in our lives. Just knowing that you have a way out of an unexpected, totally unforeseen money jams in the future, eliminates worry. You no longer wonder what you will ever do if your car doesn’t start or if you lose your job. You have a contingency fund in place so those things don’t have to fill you with worry and anxiety.
2. Pay off a debt
If you have your emergency fund established, consider using that refund to pay off a debt like the balance on a credit card account or student loan bill. Just do it before you think of a dozen ways to fritter that refund away. and enjoy the freedom of knowing that debt is gone! No more payments on it, no more lingering, annoying balance to deal with every month. You’re free from it.
How it makes your life better. It’s hard to describe in words freedom of knowing that debt is gone. No more payments on it, no more lingering, annoying balance to deal with every month. You’re free from it. Whatever the monthly was on that debt is yours to keep and manage in a way that will improve your life. It will be easier to keep all of your other bills paid.
3. Open an IRA
Using the refund to improve an existing retirement account or to start a new one could be the smartest thing you can possibly do with that refund. Once you’ve done that, it will sit there and earn a solid return each and every year, with the balance compounding and growing, until you reach retirement age.
How it makes your life better. If you opt for a Roth IRA, the amount used to open it, plus the compounding growth over the years until you choose to withdraw during retirement, is all yours. All of it! That’s the nature of a Roth IRA. See your tax advisor for more specific information that relates to your situation. To open that account see your bank.
4. Anticipate what’s coming
If you need to replace a major item like a car or some other big event in your future is looming large, use this tax refund to get ready for it. Putting money aside in anticipation of a specific need is really smart. That’s what money managers do. They see the big picture and plan accordingly.
How it makes your life better. By having at least some amount of the cost of what you know is coming down the pike, you will eliminate stress and worry about how you will ever be able to deal with it. You stop living in denial because now you have a plan and money in the bank to deal with it.
5. Invest in your future
Rich people start out as poor people. If this is money you will not need for at least 10 years, put it to work in the stock market. Take the plunge, trust your decision and then don’t look back.
How it makes your life better. Because you are investing for the long haul—not jumping in and out of the market, you can rest and relax knowing that you are making your financial future better, no matter what happens. You will be in better shape than you would have been had you spent that tax refund check wastefully. That means less money stress and fewer worries to keep you up at night.