Tax season is upon us, and for many, that’s actually good news. With the economy in a hole as a result of the coronavirus pandemic, our personal finances have taken a hit, as well. That means many of us may be in line for a refund from the IRS, and it couldn’t come at a better time.
Even with two government stimulus packages in the books and a third on the horizon, we can use all the help we can get. The question is, what should we do that windfall?
There’s always the temptation to spend it on a vacation, new smartphone, or other big purchase. And there’s nothing with treating yourself to a celebratory dinner, but now’s not the best time to splurge on something big. With that in mind, here are some ideas on how to use your tax refund that can help you improve your financial situation moving forward.
Take care of your bills
It’s not a whole lot of fun, but paying bills might be your most pressing issue. If you’ve been laid off, furloughed, or reduced to part-time status like a lot of others, you may need to use your tax windfall to catch up on monthly bills or buy essentials like groceries.
This is one useful way an IRS refund can serve as a stopgap while you’re waiting for unemployment to kick in or looking for new employment.
Pay down your debt
If you’re like many of us, you’ve built up some debt just trying to keep your head above water. Some of that debt is probably accumulating interest, so take this opportunity to pay down some of what you owe.
Check out where you’re paying the most interest or are at greatest risk of heading into collections, and pay those obligations first. If you have a high-interest credit card, that’s often a great place to start.
Build your credit
Another direction: Instead of spending your tax refund on something now, think about shoring up your credit so you can afford a bigger purchase later, when the opportunity presents itself — or creating a cushion you can call on in case of an emergency.
If your credit took a hit during the pandemic, this could be the perfect time to start building your credit back up. Put a few hundred dollars into a credit account to secure a credit card. This can keep you from overextending yourself in the present, while at the same time building your credit for the future.
Establish or bolster an emergency fund
If you’re fortunate enough to still have a job, think about what might happen if you don’t. Financial experts counsel that you should have three to six months’ worth of expenses — or more — socked away in savings so you can call upon it in the event of a crisis.
Research banks online to find out which ones offer the best interest-bearing savings accounts and choose the one that’s right for you.
Shore up the homefront
Real estate can be a great investment, and if you’ve already got a home, that can be a great place to invest your money. Add some insulation to lower your air conditioning and heating bills, or enhance your curb appeal with a front yard makeover.
This year’s ice storms have demonstrated how important (and difficult) it can be to keep the power on. If you’re in a region that’s prone to harsh weather, consider buying a generator and installing a weatherproof shed for it so you can stay warm on those cold, cold nights and keep your food from spoiling.
Save for retirement
If your employer offers a 401(k) plan with a matching contribution, take advantage of it. About half of employers offer an average of 3% of your salary, and many match 50 cents on the dollar. It’s like getting a free future bonus.
You’ll be earning money because the cash will be invested (most often in mutual funds). You won’t be able to withdraw the money without a tax penalty until you’re 59½, but the extra cash makes it worth the wait.
Another option is a Roth 401(k), which calls for taxes to be paid at the time of contribution, but after retirement, you won’t owe money on either the contributions or the earnings. You’re limited to a maximum contribution of $19,500 (or $26,000 if you’re over 50).
Expand your skill set
You might also invest some of your refund into taking an online course or working toward a certification or advanced degree. Many employers are looking for employees who meet minimum qualifications, and working toward a bachelor’s, master’s, or doctoral degree can open doors that may be closed to you right now.
In these pursuits, you’ll gain marketable skills you can add to your résumé — whether it’s grant writing, data analysis, or navigating the cloud. Skills like these can come in handy if you’re looking into starting a side hustle or self-employment gig, as well. Knowledge is always a smart investment.
Invest in your health
You can’t earn money if you aren’t healthy, and the pandemic has posed a greater risk to our health than any other crisis we’ve seen in our lifetimes. It’s not just the virus itself, but the resulting inactivity, stress, and depression that’s accompanied it.
Exercise can be a great antidote to all of the above. Plus, it can help bolster your immune system and keep you mentally sharp. A gym membership probably isn’t the best idea during a pandemic, but you can still sink a small amount into exercise equipment. Here are a few ideas:
- Jump rope
- Yoga mat
- Weights or kettlebells
- Foam roller
- Resistance bands
- Athletic shoes
Also, spend some on healthy foods, and consider a light-blocking sleep mask, too.
These are just a few ideas to get you started once that IRS deposit clears in your account. I’m sure you can come up with several others. The point is to invest, rather than simply spend.
A smart investment can keep producing a return, long after a hypothetical vacation would end or a smartphone would be exchanged for a newer model. If you make good use of your tax return, you can reap the benefits far into the future.
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Author bio: Jessica Larson is a married Midwestern mom and a solopreneur. She create online courses for students, and has started and run several other businesses through the years. Her goals are to support her family while still actually spending time with them, to act as an entrepreneurial role model for her two daughters, and to share what she's learned through The Solopreneur Journal.