Although life can be pretty unpredictable, tax season can offer a bit more financial certainty if you're one of the lucky ones receiving a refund. Here are some possible ways you can spend (or save) the money from your tax return, along with a few things to think twice about.
Save as Much as Possible
If you do receive a tax refund, consider putting most or all of it into your savings account. It's 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, even if it's just $20. Many financial experts recommend having enough savings to cover three to six months of living expenses. Your savings can also cover unexpected expenses like medical bills or home or car repairs.
If you're looking to open a new savings or money market account, make sure to read their terms and conditions and, more importantly, 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. To avoid paying interest, do your best to pay off your credit card balance each month or make payments over and above the minimum they require.
Make Improvements to Your Home
Protecting your home and other large assets involves a little TLC. Think about using your tax refund to make improvements to your home. These efforts can pay big dividends in the future by increasing your home's resale value. Or replacing appliances, equipment, or windows with more efficient options could save you money every month by reducing energy costs—you might even be eligible for energy efficiency rebates through your power company! If you're curious, learn more about which projects add the most value to your home.
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 could be eligible for an annual tax deduction or credit. WaFd Bank offers a Coverdell Education Savings Account to help pay 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 get your tax refund, you may want to add money to your retirement account. If you're starting a new retirement account, make sure to do your homework because 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
The past few years have been financially taxing on many individuals, families, and businesses across the country. If you're 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 might be able to claim your donation on your next tax return but always double-check with a financial advisor to be sure.
What Not to Do with Your Tax Refund
Basically, try not to overspend or splurge too much. There's nothing wrong with treating yourself, but think about whether it's really something you want to do and will still be worth it in a few months or if it's more of an impulse thing. Although it's fun in the moment to get something nice, any debts and payments you might have to make will still be there afterward. Consider spending your refund on necessary purchases or putting it into your savings account for emergencies instead. Your future self will thank you!
Want Help Managing Your Money?
WaFd Bank is here for you, and no question is too small for our friendly bankers! You can open an account online, visit us at your neighborhood branch, or give us a call at 800-324-9375 to learn more.