If you’re expecting a tax refund this year, it’s a good idea to have a plan for your money. While you may be eyeing a flat-screen TV or getaway weekend, it’s important to treat your tax refund check the same way you’d treat your weekly or monthly paycheck. Give the money a purpose by considering your personal financial situation and determining your needs.
Here are 5 financial tips you may want to consider putting your refund toward this tax season.
1. Start or add to your emergency fund
Without an emergency fund, you’re left vulnerable. Should an unexpected event occur such as a job loss, medical emergency, or major repair, you may be forced to turn to short-term loans at high interest rates or carry credit card balances. Give yourself some breathing room. Many experts say that your fund should contain about six to eight months’ worth of savings in its own account. Storing that much money might take months (or years) if you’re adding a little amount each paycheck, so use your refund to start your emergency fund or make a significant deposit.
Tip: An emergency fund should be separate from a regular checking or savings account, so that you’re not tempted to spend it. And if you’re not going to spend it, you might as well put it into savings and make money off of it. Look to place your fund in a high-yield savings account that offers a competitive interest rate.1
2. Pay off debt
Using your tax refund to help pay down debt, especially high-interest debt, can remove a huge weight from your shoulders and save you money in additional interest fees. Pay off your student loans, car loans, title loans, or even credit card debt. Going this route allows you to put more money in the bank every month once those payments vanish from your list of bills.
3. Add to your retirement account
In the future, you’ll probably be grateful that you put money toward retirement rather than spend it on something you’ve long since forgotten about. Boost your retirement savings by putting that money into a conventional or Roth IRA. This will supplement your 401(k) savings. If you haven’t already filled up your annual IRA limit for the 2022 year – $6,000 (or $7,000 if you are over the age of 50) – it’d be a smart choice to do so.
4. Start your side business
You don’t have to quit your current job to start your own business. If you’ve always wanted to sell your handmade jewelry or customized clothing, a tax refund can provide the seed money to build up inventory, design a website or online store, and allow you to turn a hobby into a money-making enterprise.
Tip: Separate your personal bank account from your side businesses’ bank account. Having a separate business account is important for many reasons, but especially important for when you go to file next year’s taxes. Take a look at LendingClub Bank’s small business Tailored Checking account. A few benefits include unlimited transactions and free ATM usage.2
5. Buy life insurance
Life insurance can be easy to overlook, especially for younger individuals who are confident they have time and can worry about it down the line. A term life policy can provide protection for loved ones. For the cost of a few hundred dollars, your tax refund can allow your family to maintain its standard of living if the unthinkable happens.
Whether you decide to use your refund to pay off debt, build up your savings, or take that vacation you’ve always wanted, be sure to spend or save it with purpose.