What Should You Do With Your Tax Refund?
Thursday, February 13th, 2020

It’s tax season. That means that nearly everyone in America is participating in the annual activity of filing their taxes. We do this to calculate our adjusted income for the year and determine if we still owe taxes. Although it can be stressful, most of us know ahead of filing our income taxes whether we will receive a refund or if we’ll have to pay.

For the sake of today’s discussion, let’s focus on those who have received or will receive a tax refund. Read on to discover the top three ways that you can choose to use your tax refund, and if it is beneficial to work with a financial planner during tax season.

Option 1: Spend it

Whether it’s a spring break or family vacation, catching up on bills or paying down debt, many taxpayers who receive a refund annually have an idea of how they will spend it. Some of these plans are more responsible than others. There are a few ways in which you can spend your tax return, but still have it be financially advantageous for you.

Many people choose to spend it in ways that boost their quality of life such as doing a much-needed home repair. This might be a good way to spend your money because home improvement projects often increase the value of a home as well.

Another responsible way to spend your tax return is to pay down your debt. For example, you might want to eradicate your credit card debt or make a lump-sum payment on your auto or student loan. Another clever option is to make a payment toward your mortgage. By decreasing the principal of your loans, you will spend less in interest over time.

While some plans are more responsible than others, the goal should be to have a vision for how you will spend your money that contributes to a bigger goal. Although sometimes it’s fun to have extra money to spend, you may want to consider the bigger picture.

Option 2: Save it

Saving money is always a good idea and a tax refund can be a great boost in savings. There are several ways that you can save your money and allocate it toward your larger savings goals.

One example of saving your tax refund is to start your emergency fund. Most experts will tell you that every person should aim to have three to six months of your expenses set aside for emergencies. If you have no savings, consider taking this year’s tax refund and opening a savings account at your credit union or bank to be used as an emergency fund. If you already have some money set aside for emergencies, you can use part of your tax refund to round it out to at least $1000. When you have some savings, you will also have the security that at least the initial phases of just about any emergency can be managed sufficiently.

Another example of saving your tax refund is to begin contributing to a financial savings goal. For example, you might want to start saving for a home improvement project or future vacation. Many people put these expenses on credit cards or dip into their emergency funds. Instead, you can save your money in advance and start building toward your financial goals.

Regardless of your savings philosophy, you may want to put your tax refund aside without any intention of touching it.

Option 3: Invest it

The third option is to invest your tax return. Everyone has different financial goals, so if you’re ready to start investing, you might want to start by speaking with a financial planner or financial advisor. There are a few things that you can do on your own to start investing with your lump-sum tax refund.

The first option is to contribute toward your individual retirement account (IRA) or 401(k). The earlier you start saving for retirement, the more that compound interest will work in your favor. Be sure to explore what the contribution limits, tax benefits, and restrictions of each option are before deciding.

Another investing option is to make a down payment on a property or decrease the principal on your mortgage. If you’re planning to purchase a home, you can use your tax refund to make a larger down payment, therefore decreasing the size of the mortgage and interest payments over time. If you already own a home, you can decrease the amount of your monthly payment that goes to interest by making a lump-sum payment toward your principal. Be sure to speak with a financial advisor or mortgage professional before making any payments so that you can ensure that your investment is working most advantageously for you.

The Bottom Line

Receiving a tax refund can be both fun and intimidating. There are several options for your refund, so remember to keep your priorities in mind when deciding how to allocate your money.

If managing your refund feels intimidating, you may want to speak with a financial planner. They can help you determine the best path forward for you and your family. At Navalign Wealth Partner, our team is small enough to offer the best in personal service, and we will be happy to have a conversation with you about the best way to use your tax refund.