Expecting a substantial income tax refund this year? Get the most out of your cash with these tips:
- Save for emergencies. Open a savings account that serves as an “emergency fund.” Ideally, it should hold about three-to-six months of living expenses in case of sudden financial hardships like losing your job or having to replace your car.
- Pay off debt. Pay down existing balances either by starting with loans with the highest interest rates or eliminating smaller debt first.
- Save for retirement. Open or increase contributions to a tax-deferred savings plan like a 401(k) or an IRA.
- Make an extra home mortgage payment or two. Though you won’t feel the benefit immediately, doubling up on a mortgage payment now can save you months of mortgage payments later.
- Put it toward a down payment. The biggest challenge that most first-time home buyers face is coming up with enough money for a down payment. If you intend to buy a new home in the near future, putting your tax refund toward the down payment is a smart move.
- Invest in your current home. Use your refund to invest in home improvements that will pay you back in the long run by increasing the value of your home. If you have more substantial renovations in mind, we can help with a home equity line of credit.
- Open a College Savings Plan for your child. A four year college education can cost upwards of $100,000.
Although the preceding ideas are excellent uses of a lump sum amount of cash, instead of planning for a refund, it could be more beneficial to come out even. Consider changing your withholding exemptions so less tax is withheld from each paycheck.