This post is sponsored by First Alliance Credit Union
If you are fortunate enough to get a tax refund this year, you’ve probably got a few ideas about how you can spend it, like on a new smartphone or a family vacation. Before you start making purchases, though, take some time to consider all your options.
After all, a tax refund can do a lot more than simply give you a new toy or weekend trip. It can help you reach your financial goals, strengthen your financial foundation for the next year, and even reduce your monthly expenses. All you have do is know the right moves to make.
Know Where you Stand
Before you can put your tax refund to its best possible use, though, you should know where you stand financially. If you don’t, you might overlook an area of your finances where a tax refund windfall could do the most good.
Examining your financial situation might sound complex, but it really isn’t. Start by looking at your assets (i.e. the things you own), like your savings accounts, investment accounts and retirement funds. Don’t forget to include items like real estate and automobiles, too.
Once you’ve looked through all your assets, it’s time to look at your liabilities. In other words, how much debt do you owe? The most obvious examples of this are credit card debt and student loans, but you might also have a mortgage, an auto loan, personal loans, home equity loans and even a line of credit.
Seeing this information laid out before you can give you a clearer idea of where your refund will have the biggest impact. If you want to have an even clearer picture, though, take our free downloadable financial fitness exam. It will not only help you figure out where you are financially, it will also give you some concrete steps you can take to improve your financial fitness.
Pay off Your Debts
Paying off your debts might not be the most fun way to use your tax refund, but it might just have the biggest effect on your finances. When you pay back debts, you’re saving yourself from paying all the interest your creditor would charge you, which can amount to hundreds, if not thousands, of dollars. Even better, you’re also freeing up your income to help you achieve your financial goals.
If you have multiple debts, you might not know which ones to pay off first. Fortunately, there are some guidelines to help you decide:
- Start with debts you can completely pay off to stop them from accruing interest
- Paying off smaller debts first will free up money to help you pay off larger debts in the future
- Paying off larger debts first may save you more money in interest
- If you have two debts with roughly equal amounts, pay off the debt with a higher interest rate
Pad out Your Emergency Fund
Another excellent way to put your tax refund to use is by strengthening your financial foundation. In other words, make sure you have an emergency fund with enough money in it to help you get through an emergency.
How much should you have in your emergency fund? If you have at least $2,000, you should be able to handle most emergencies. However, most financial experts recommend having at least three to six months’ worth of salary saved in case you get laid off or lose your ability to work for any reason.
If you do put your tax refund into your emergency account, you might also want to look for ways to get a higher interest rate than you would from a traditional savings account. If you have over $2,000 in your emergency fund you can open a high-yield money market account. However, if you don’t mind putting in a little planning, you might even be able to invest part of your emergency fund in a CD ladder to take advantage of high interest rates while keeping your money accessible.
Finance Some Needed Expenses
While paying off debts and saving for emergencies should be high priorities, you might also have some expenses you’ve been putting off until you’ve saved up enough money for them. This could include:
- Replacing a dying appliance, like a stove or washing machine
- Buying a new(er) car
- Financing home repairs
Just make sure you don’t overspend. It can be tempting to buy a top-of-the-line item, like a refrigerator with an internet connection, but unless you’re sure your life would be significantly better, you might want to stick with a more economical model so you can make your tax refund go even further.
Put it Toward Your Goals
Paying off debt and building up your savings account are important financial goals, but they’re far from the only ones. Most people have several financial goals, and a tax refund can help you get closer to achieving them.
The first step in using your tax refund to achieve your financial goals is just to think about all the goals you have. If you haven’t already, you might even want to write them out. These can be short-term goals like:
- Funding a summer vacation
- Remodeling a room
- Buying new furniture
It’s worth pointing out that some of the necessary expenses might also be considered short-term goals. What separates the two should be how urgently you need the item in question. If your current car is on its last legs, for instance, it’s a needed expense bordering on an emergency. If your car is still in reasonably good shape, though, you might want to make saving for a new one a short-term goal.
In addition to your short-term goals, you’ll also have long-term goals, which could include:
- Funding your retirement
- Saving for a down payment on a house
- Starting your own business
- Saving for your child’s college education
Once you’ve got your list of goals in front of you, think about which ones are the most important to you, as well as which goals are currently underfunded. Then use the money in your tax refund accordingly.
If you’re not sure how on track you are to reach your goals, consider making them SMART. In other words, your goals should be:
You can get help making your goals SMART by downloading the free First Alliance SMART goals packet. It even has a tracker to show you how close you are to your goal.
Have Some Fun
Let’s be honest, paying off your debts and building up your emergency fund may be the responsible moves, but they’re also kind of boring. When you got your tax refund, you probably thought of some much more fun ways to spend it.
Believe it or not, you absolutely should spend some of that money, unless your financial situation is especially dire. Otherwise, you’ll end up feeling deprived and less likely to make those responsible, forward-thinking money moves in the future.
Take about 10% of your tax refund and use it on something fun for you. Whatever you spend the money, on though, do not feel guilty about it. This is your reward for a job well done.
Make the Most of Your Tax Refund with First Alliance Credit Union
When you get a tax refund, you’ll probably come up with all sorts of ways to spend it. However, if you put it towards paying off your debts, your emergency fund, and your financial goals, you’ll be more secure, and a lot happier, in the long run. You can even use some of your tax refund to reward yourself afterward.
If you need help maximizing the effect of your tax refund, become a member of First Alliance Credit Union today. You can have your tax refund directly deposited into an account, and from there you can put it in a money market account or a CD or pay off your debts with our electronic bill pay service. You can even open multiple savings accounts to help you save for different financial goals.