Experts recommend leveraging that extra money to bulk up your emergency savings or pay down your debt.
By Emily Sherman, US News & World Report featuring Tony Delane, CFP®, AIF®, Associate Wealth Advisor
With tax filing season in the rearview mirror, most Americans have received their refunds – or will soon. But what should you do with the money once it arrives?
Whenever you get a windfall, it can be tempting to splurge on something fun. While it can be great to treat yourself with extra cash, a tax refund is also a great opportunity to shore up your emergency savings, make investments or use it to increase your financial security.
What to Do With Your Tax Refund
If you do end up getting a refund, how should you spend it? Experts agree prioritizing savings and debt payments is the best strategy.
“The best thing to do with extra money is almost always to save it, invest it or use it to pay down debts. However, this isn’t always an easy option for everyone. If your tax refund is the only big windfall during the year, you might really want to spend it, and if so, you need to be strategic. Try to strike a balance between doing something fun and something responsible,” says Charlie Corsello Jr., enrolled agent, president and founder of TaxCure.
While it can be great to treat yourself to something fun, try and prioritize these options first:
1. Build Your Emergency Fund
An emergency fund is a critical tool for maintaining financial security in case of unexpected expenses or a layoff. If you aren’t able to put away three to six months of expenses in your savings with your normal paychecks, you can use your tax refund to boost that number.
2. Pay Down High-Interest Debt
If you’re carrying a balance on a credit card or other form of high-interest debt, odds are those interest charges are racking up over time. Paying down that balance will save you money in the long run and free up your budget for fun purchases.
3. Invest Extra Cash
You can make a large sum of money work for you by investing it.
“If your emergency fund and other short-term obligations have been met, it’s a good idea to invest for the future. This is historically a good time to deploy excess cash into the markets,” Delane says.
The same goes for retirement savings: Adding extra cash to the pool means it has a chance to grow over time and pay off more in the long term.
