It’s spring, which means tax season is officially upon us! Filing Day is April 18.
While most of us associate taxes with paperwork, organization and general hassle, it’s always nice to receive a refund. After all, who doesn’t appreciate a bit of unexpected income? Though your initial reaction may include a shopping spree at Northwoods Mall or taking a trip, strategically allocating the additional income can make a difference in your overall financial situation. Consider the following strategies:
Reduce High-Interest Debt
If you’re struggling to manage debt and keep up with payments, allocating any excess income to alleviate that burden is a prudent decision. Utilizing a tax refund is a good option because it doesn’t require that you pull money from other areas of your portfolio. No matter the size of your refund, any amount applied toward paying off debt can help provide the jolt needed to really make headway on repayment.
As a general practice, try and pay down high-interest debt first. Making a payment toward debt with a higher interest rate will generally save you more in the long run than the same payment toward debt with a lower interest rate.
Bolster Important Funds
Applying a portion of your tax refund to either an emergency fund or a college savings account is also a good option. I recommend funding an emergency account with anywhere from three-to-six months’ worth of expenses, but you can never have enough. If a sudden loss of income or natural disaster were to occur, an emergency account provides a financial safety net for your family. A tax refund is a great initial contribution for those who have not yet opened an emergency account.
Beginning to save for your child’s education early is also important, as his or her freshman year will come in the blink of an eye. Many families opt for a 529 plan, which allows money to grow tax-free as long as the withdrawals are used for qualified education expenses, such as tuition, room and board or books. Contributing to the account each year is crucial, and allotting a portion of your tax refund can be an easy way to supplement regular contributions.
Donate to Charity
Charitable donations are a great way to utilize your refund in a manner that enhances the community. If making a donation is the right option for you, start by identifying a local Peoria organization or national cause you care deeply about and allocate all or a portion of your refund.
Remember, the size of the donation does not matter. There are many different ways to donate your tax refund including through a direct gift or tangible assets. In addition, a charitable donation can also have certain tax benefits depending on your financial situation.
Although it may not be top-of-mind upon receiving a tax refund, consider utilizing the money to better your career or to achieve a goal. Perhaps you aspire to learn digital design or photography to strengthen your resume. Or take a swimming class to train for your first triathlon.
A tax refund may provide the added funds you need to finally register for a class or make progress on an ambition. This is different than simply spending the entire refund on new clothing or a nice pair of shoes, as the development of skills can be a true investment in your future.
Receiving a tax refund is similar to an unexpected bonus. While you can certainly reward yourself a bit, it is important to take a step back and analyze your financial situation and determine a few areas that could benefit from extra funding. You’ll be surprised at the positive impact. iBi
Patricia Cutilletta is an Executive Director and Financial Advisor with the Wealth Management Division of Morgan Stanley in Chicago.