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Four Smart Ways to Use Your Tax Refund

Four Smart Ways to Use Your Tax Refund

May 01, 2024

If you’re receiving a tax refund, you may be tempted to spend all that cash on purchases that will meet your needs today. However, a lump sum tax refund is an opportunity to fulfill your needs of tomorrow and beyond. Before you decide what to do with those funds, consider these four ways to put your money to work for you.

  1. Save or Create an Emergency Fund

You should have at least three to six months’ worth of living expenses available through an easily accessible emergency fund. If you are one of the many Americans who don’t have an adequate savings account, this should be your first choice for leveraging your tax refund. Without an emergency fund, you’re vulnerable to large expenses and life circumstances, such as medical emergencies, job loss, auto or home repairs and unplanned travel. A high-yield savings account is a good option for your emergency fund, as long as it’s FDIC insured, and you won’t be penalized for transfers.

  1. Fund Your Retirement

The cost of retirement is higher than you think, and far too many people are unprepared. Some are under the impression that their expenses will decrease when they are in retirement, but typically, the opposite is true. You may want to spend those years traveling or relocating closer to family. You may require medical care or assisted living. Preparing your finances for your golden years is one of the most important things you can do for your future.

If your employer offers a 401(k), make sure you’re contributing enough to receive all available matching funds and consider increasing your regular contribution after receiving an IRS windfall. Likewise, your refund could be used to purchase or augment a Roth or traditional IRA.   

  1. Pay Off High-Interest Debt

If you have credit card debt that’s racking up interest, creating a plan to pay it off is a great way to use this year’s refund. If you’re only making the minimum payment each month, you could end up paying thousands more than necessary in interest costs. Consider using your tax refund to pay off more than your monthly payment to pay down as much debt as possible and reduce your balance.

  1. Invest in a Long-term Strategy

Investing in the stock market is a good way to take advantage of compound interest to put your money to work for you and watch it grow over time. At Schmerling Financial Group, we will develop an investment strategy for you and continually review your asset allocation needs, staying aligned with your risk tolerance long-term financial goals.

Tax refunds can be the most considerable lump sum of money that individuals receive all year. Before deciding to spend your refund, look to invest, save or pay off debt.

To learn more about how we can support your financial planning needs, contact us.