Tax refunds present an opportunity to better your financial health. Unfortunately, many refund recipients don’t take advantage of it. “A tax refund often feels like ‘free’ money, and many people use the funds to splurge on expensive items they wouldn’t otherwise purchase,” says Mike Sullivan, chief education officer for Take Charge America, a national non-profit credit counseling agency. “However, a refund presents a unique opportunity to use the money to improve your family’s financial well-being now and in the long term.” If you receive a refund this year, consider using it in one (or all!) of the following ways:
- Pay Off Debt – When you receive your refund, resist the urge to spend it on a shopping spree, fancy dinner, or pricey vacation. Instead, use your refund to pay down credit card balances, student loans, auto loans, or other debt.
- Pay Down Your Mortgage – Direct your refund toward your mortgage principal. Even one extra payment each year can shave noticeable interest off your mortgage.
- Boost Your Savings – If you’re debt-free, put your money toward your emergency savings fund, retirement plan, or college savings account.
- Adjust Your Withholding – File a new W4 to increase your allowances and pay the appropriate amount of taxes throughout the year. Use the IRS withholding calculator and aim for the number of allowances that satisfies 100 to 110 percent of last year’s tax payment.
- Use Direct Deposit – Set up an automatic deposit to direct the money you would have spent on excess taxes into an interest-bearing savings account. You won’t notice the difference in your paycheck— it’s money that would have been withheld for taxes—but your contributions will quickly add up.
“While it’s fun to receive a windfall of cash, it’s important for consumers to understand the IRS isn’t giving away money—they’re returning money they borrowed, interest-free, all year long,” adds Sullivan. “It’s a good idea to adjust your withholdings to break even and make your money work for you—not just the government—throughout the year.”