Make the most of your tax return this year
We know how exciting it is to receive a tax return from the IRS. Having some of your hard-earned money returned to you can be a huge relief. But if you don’t need the money to pay bills right away, the temptation to spend it on things you might not need can be strong. Who wouldn’t like a new TV? If you feel like putting your funds toward something more financially rewarding, however, here are a few options to help you make the most of this year’s tax return.
Fund Your Emergency Nest Egg
Pay yourself first! It’s a good idea to keep enough money in a savings account to cover expenses for several months if you become unable to work for some reason. Plus, when you don’t use your savings for an emergency, your funds will earn interest each month. It’s much more valuable (and a little less tempting) to have the money in your savings account than sitting in your wallet. If you’re worried about temptation, consider a certificate of deposit (CD) or another account that limits your ability to withdraw the funds. Many of these accounts offer higher interest rates anyway.
Start Saving for a Home
When you rent or lease your home, your money goes into the pocket of the property owner. When you own your home, the money you pay toward your mortgage contributes to your equity in the home (the portion of the home that you actually own). That equity is an asset to you, because it will factor into your credit and net worth, and you can take advantage of it to secure a low-rate home equity loan if you need to in the future. Use your tax return to start a savings account to buy your own place, and you’ll be one step closer to long-term savings.
Pay Down High-Interest Debt
If you’re working to pay off credit card or student debt, paying the minimum monthly payment will stretch the process out for years, and you’ll end up paying a lot of money in interest. Organize your loans from highest to lowest interest rate, and use your tax return to pay down the principal on the highest-rate loan. In the long term, paying your highest-rate debt down first will save you money on interest.
Begin Saving for Retirement
It’s difficult to predict your financial stability when you reach retirement age, so it’s very important to plan ahead. If your employer doesn’t offer a retirement plan, you can start your own. Many credit unions and financial institutions offer individual retirement accounts (IRAs) to help you save for your later years. Some of these accounts offer tax benefits, so talk to your tax and investment advisers to help pick the best account for your goals. You might be surprised how the power of compounding interest will multiply your tax return into a healthy retirement account over the years. And if you already have a retirement account through your employer, you may be able to deposit your tax return for additional tax benefits next year.