Are you trying to figure out the smartest ways to spend your tax refund this year? Considering the economic effects of the pandemic, you might be wondering how you can put those funds toward your long-term financial goals. Below, we’ve compiled expert tips for applying your refund according to your needs.
Pay down your debt
According to Andy Wigzell, a financial planner with Barnum Financial Group, there are two schools of thought around paying down debt. “The first is tackling the high-interest debt first, even though you might not pay it off entirely. The other, which I find more personally successful for clients, is knocking off one bill at a time in full even if it’s not high-interest debt,” he explains.
When it comes to spending your refund check, you might be better served paying down a balance on a high-interest credit card (typically considered to be 14 percent or more) or personal bank loan than low-interest debt (like student loans). That’s because paying down high-interest loans first can save you more money in the long-run by eliminating those high-interest charges. Alternatively, it may make sense to pay off a bill in full, if you can. “It can feel incredibly rewarding to pay off a bill entirely,” Wigzell notes. Think about which option might be best for you.
Build your savings account or emergency fund
A refund check can be a smart way to create an emergency fund to help pay for unforeseen circumstances, like home and auto repairs and medical emergencies.
“You should have enough money on hand to prevent you from having to use a credit card to stop the boat from leaking,” Wigzell says. If you haven’t set up an emergency fund, consider putting a sizable portion of your refund aside to build one.
In regards to building your savings, Wigzell recommends a two fold approach: Putting the bulk of your money into liquid accounts, like a money market or high-yield savings accounts, so you can have access to your funds when needed (while earning some interest), and investing a smaller portion in the stock market may make sense. You may want to consider investment options like dividend-yielding stocks, which can help provide you with steady cash while they’re in your portfolio. Talk to a financial advisor (another smart investment for your refund!) about customizing a financial plan for your needs.