Tax season is usually met with a collective sigh, however, it’s not all doom and gloom as most of us can expect to receive some sort of tax refund this year. What should you do with that money that is burning a hole in your pocket? We spoke with money experts who share their top money tips to help your money work harder for you.
Before you blow that money on a trip to Disneyland or some fabulous shoes you have had your eye on, take a look at your budget and all your debt and see where you land.
“It’s best to assess your financial goals before you decide where to spend or save,” says Whalen. “Since most families have multiple goals such as saving more for retirement, paying down debt or creating a savings cushion you may decide to split the funds up between your goals.
Pay off debts
Are you behind on any monthly bills? Use your refund to tackle those first so your credit rating doesn’t take a bigger hit. Next up, pay off those nagging credit card bills. Not only will you save money in the long run by avoiding interest charges, but you will be surprised at how much lighter you feel emotionally.
“In years past, each family member gets something they have really needed as we often looked at the tax return as a bonus,” said mom Terri McCoy. “One year we even used it for passes to a theme park. This year, we put our entire tax refund to paying off any credit card debt and it is so, so much rewarding.”
Whalen says the only exception to paying off credit card debt is if you have a 0 percent introductory rate: “Sock your funds away in savings until it’s time to pay off those debts.”
Build up your savings
Retirement consultant and author Danny Kofke says moms should make saving a priority. In fact, he says saving should come over paying off debt.
“I feel that moms should first use their tax refund to build up a savings account. I recommend beginning with at least one month worth of living expenses,” he says. “If there is some left over after this, I recommend paying off debt in order from least to greatest, excluding the mortgage if applicable. If there is some after this, I recommend putting the rest in a savings account.”
Investing for retirement
Kevin Gallegos, vice president of Freedom Financial Network, says that after paying off debt and creating an emergency fund, contributing to your retirement savings should be next priority. “Add to your savings, whether it’s an individual or Roth IRA, 401(k) or other plan. If the program is tax-deductible, you will be helping your tax situation for next year, too,” he says.
What about using your tax refund to pay down your mortgage?
Whalen says that using your tax refund to pay down your mortgage isn’t always the best idea — unless you are paying Private Mortgage Insurance (PMI).
“In most cases paying down your house loan is not going to give you the biggest bang for your buck,” she says. “You’d be much better off saving it or investing than paying down your loan. There are always exceptions though. If you are paying PMI on your home loan and this would get you closer or to the point where you aren’t paying PMI, then it could be worth paying down your home loan.”
After all the above has been taken care of, Gallegos says you should consider a college savings plan for your kids. “A $3,000 refund could pay for a good portion of an associate’s degree,” he says.
Refinance your mortgage
If you have a high-interest mortgage, you could save thousands more in interest over the life of the mortgage by refinancing to a lower interest rate. “If you own a house and are stuck with a high-interest mortgage, that $3,000 refund can cover all or most of the costs of refinancing if your credit is good enough to do so,” says Gallegos.
Give it to your favorite charity
Giving to a charity is a win-win. “Taxpayers can receive a deduction on next year’s taxes, depending on income limits. Be sure to obtain a receipt for any donation,” says Gallegos.
Consider using your tax refund to upgrade your kitchen or fix that broken backyard fence. These home improvements often create additional equity in your home and prevent larger (and more expensive) problems down the road.
Fund your Health Savings Account
If your health insurance policy has an HSA, fully fund it to take advantage of the tax benefits, says Gallegos.
What about “fun money?”
What about using your tax refund for something fun — like an amazing family vacation? Single mom Cathryn Lee, who is starting over in a new career, is doing just that.
“I need to release this pinned up frustration and anger from the former employer to start anew. So my tax refund will be used as a ‘Best Day Ever!’ I am vacationing so that the next chapter in my life will be greater than the previous — and besides I earned it,” she said.
As you can see, there is no “one right answer” when it comes to the best way to manage your tax refund.
“Invest some, save some, pay off some debt, treat yourself with some and do something special with your family,” says best-selling author and mom Sherlyn Pang Luedtke.