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Last year, roughly 64% of taxpayers received a tax refund. While it’s really just a reimbursement for having too much money withheld from your paychecks, a tax refund can certainly feel like an extra perk. This lump sum payment also provides you with an opportunity to make a positive impact on your financial goals.
Here are five ways you can put your tax refund to good use:
1. Put it towards emergency savings. Having an emergency fund is important to help cover unexpected costs, or to help you get through a job loss or medical leave. Without emergency savings, you might resort to racking up high-interest credit card debt, or damaging your credit with unpaid bills. If you don’t already have an emergency savings account, you could use your tax refund to start one, and if you do have one, your tax refund could be used to grow your emergency fund.
2. Repay student loans. Whether you graduated from college last year or 10 years ago, student loans can take a toll on your financial freedom. Putting your tax refund toward your student loan balance can help you pay down your debt quicker. The good news is that all education loans, including federal and private student loans, do not incur penalties if paid off early.
3. Pay off credit card debt. Most credit cards charge high interest rates. This means that if you carry a credit card balance each month, you’re throwing away hard-earned money. Consider using your tax refund to pay down your credit card balances. If you have multiple credit cards with a balance, a good rule of thumb is start with paying off the card that has the highest interest rate. Once you make a lump payment using your tax refund, you can use a credit card payoff calculator to formulate a monthly plan for eliminating the rest of your credit card debt.
4. Make extra payments on your mortgage. Making extra payments can help you pay off your mortgage faster, and can end up saving you a lot of money in interest. Putting your tax refund toward your mortgage balance can be an easy way to get an extra payment in. You can also use a mortgage payoff calculator to see how additional extra payments can help you save money in the long run.
5. Use the money to earn more money. Consider depositing your tax refund into an account where it can generate additional funds. A high-interest savings account or a CD could help your money grow. There are many banking products out there that can provide an attractive interest rate. A prize-linked savings account is another option to consider. This unique type of savings account allows you to win cash.
No matter how big your tax refund is, the most important thing you can do is spend it wisely. While it might seem tempting to blow the money on a special item or outing, it can have a much bigger impact on helping you reach your financial goals.
Anne Tangen is the President & CEO of BankFive, a mutual bank with 17 locations in Massachusetts and Rhode Island, including two in New Bedford.
Editor’s note: BankFive is a New Bedford Light donor. The Light’s newsroom is scrupulously independent. Only the editors decide what to cover and what to publish. Founders, funders, donors and board members have no influence over editorial content.