As tempting as it may be to go on a shopping spree with your tax refund, it’s probably not the best financial decision. It would be much wiser to put your money towards something beneficial, like paying off your debt or investing in your future. While it doesn’t seem exciting to use your refund to pay off a credit card or refinance your home, it will give you more financial freedom to do the things you love. Here are 5 smart ways to spend your tax refund this year:
Pay down your credit card debt – Depending on how much money you get back from the IRS or the state, you may be able to significantly pay down (or pay off!) your credit card debt. Not only will this lower your monthly bills and free up your spending, it may also improve your credit. If you have multiple credit cards, pay off the ones that you can pay in full first and then tackle the card with the highest interest rate next.
Start an emergency fund – If you were to lose your job or have unexpected medical expenses come up, how long would you be able to support your family? A couple of weeks? A month? 6 months? It’s hard to imagine anything bad happening to you or someone you love, but the reality is you have to be prepared for anything. You should aim to have 3-6 months worth of income set aside in a money market or savings account to use towards unexpected expenses.
Put a deposit down on a secured credit card – If you have little to no credit, a secured credit card can help you build or rebuild your credit score. In order to get a secured credit card, you have to put down a deposit. Your deposit equals your credit limit on the card, so a tax refund is a great way to begin building or rebuilding your credit without it affecting your bank account.
Discover offers the Discover it Secured Credit Card which can help you build a credit score within 9 months, while offering the suite of Discover card benefits. Not only do you get 2% cash back at gas stations and restaurants and 1% on other purchases, Discover also reports to all three major credit bureaus. After a year, Discover will reevaluate your credit status to see if you’re eligible to graduate to a Discover account without a security deposit.
Some other benefits of the card include:
- No annual fee
- FICO® Credit Score with every monthly statement
- No late fee on your first late payment, and no increase to your APR if you pay late
- Freeze It℠ – an on/off switch on the Discover mobile app or website to help prevent new purchases on lost cards
- $0 Fraud Liability Guarantee
Refinance your home – If you plan on staying in your home for at least three to five more years, you may want to consider refinancing your mortgage to get a lower interest rate. Not only will this lower your monthly mortgage payment, it could also eliminate your monthly mortgage insurance premiums. This could save you hundreds of dollars each month! It could also reduce the amount of time that it takes you to pay off your home if you decide to change the term of your loan from a 30-year loan to a 15-year loan. One downside is you will need to pay closing costs again. If your tax refund can cover all your costs, this would be a great way to lower your mortgage.
Contribute to your retirement account or college fund – While it can be hard to save your money for the future, it’s one thing you will be thankful for later. Put your tax refund in a traditional IRA or another tax-deferred account, like a 401(k) or 403(b), and you’ll also pick up a tax deduction on next year’s returns. If you have kids, it’s also wise to start saving for college as soon as possible. If you put your refund in a qualified state-run 529 plan, you’ll be able to withdraw the money tax-free for tuition and supplies when your child heads off to college.
There are so many ways to spend your tax refund. Whether you choose to allocate it to one or two of these smart investments, or you choose to spend it another way, make sure you spend it wisely!
Did you get a tax refund this year? How do you plan on spending it?
I wrote this post as part of the Discover Preferred Blogger Program. All opinions are my own.
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