Although life has been unpredictable over the last year, this tax season may offer you a bit more financial certainty if you are one of the lucky ones receiving a refund.
To improve your financial health, here are some possible ways you can spend (or save) the money from your tax refund.
Save, save, save
Many financial experts recommend having a savings large enough to cover three to six months of living expenses. This emergency fund is especially important right now since businesses may be struggling financially, possibly leading to layoffs or a reduction in pay for employees. It can also cover unexpected expenses like medical bills or home or car repairs.
If you receive a tax refund, consider depositing it into your savings account. It is also a good idea to look at your monthly budget and commit to saving a certain amount of money each month for extra financial security.
If you are looking to open a new savings or money market account, make sure to:
- Read the financial institution’s terms and conditions
- Comparison shop by researching account options at different banks (pay close attention to monthly fees, interest rates, minimum balance requirements and the cost to open an account)
WaFd Bank’s savings account options require just $25 to open an account (only $10 if under age 18) and feature low minimum monthly balances.
Pay off your debts
Another path you could take toward financial freedom is using your tax refund to help pay off credit cards, student loans, medical bills or other high-interest debt.
Although interest rates remain low, the interest you may pay on credit cards remains high (an average of nearly 15%). To avoid paying interest, pay off your credit card balance each month.
Make improvements to your home
Protecting your home and other large assets involves a little TLC (tender loving care). Consider using your tax refund to make improvements to your home. These efforts may pay big dividends in the future by increasing your home’s resale value. Or, in the near future, replacing appliances, equipment or windows with more efficient options may save you money each month by reducing energy costs.
Contribute to a college savings plan
Contributing to your child’s college savings plan is a smart investment. Depending on the plan you choose and the state you live in, you may be eligible for an annual tax deduction or credit.
WaFd Bank offers a Coverdell Education Savings Account to help cover education expenses. Currently, you can contribute up to $2,000 (after taxes) annually per child. When the funds are withdrawn, they are tax-free.
Want to know how much to save for college? Use the College Board’s College Savings Calculator to crunch the numbers.
Prepare for retirement
Planning for your financial future starts now. When you receive your tax refund, you may want to add money to your retirement account.
If starting a new retirement account, make sure to do your homework since there are different rules and restrictions for each type of account, like the maximum amount you can contribute annually.
WaFd Bank offers two types of Individual Retirement Accounts (IRAs) — traditional and Roth. With a Roth IRA, you pay taxes when you first put money into the account and do not have to pay taxes when you withdraw the money in retirement. The money invested in traditional IRAs is not taxed when first invested, but is subject to taxes when funds are withdrawn.
Donate to a good cause
This past year has been financially taxing on many individuals, families and businesses across the country. If you are in a comfortable financial position, consider donating all or some of your tax refund to a good cause, like a food bank or a local nonprofit. You may be able to claim your donation on your next tax return.
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