For millions of Americans, tax season means extra cash season. The average refund in 2020 was $2,741, enough money to make a real change for many families — if they use it wisely. Here’s how you can make for a brighter 2021 and beyond with a few wise choices when your refund arrives.
- Fight the Urge To Splurge
For most of us, getting your tax refund seems like the perfect opportunity to splurge. After all, who doesn’t love spending money they didn’t have a second ago? Although it may seem like the best time to buy everything off your Amazon wishlist, your refund may be of better use as a financial seed for the future. Coming off a tough year, it’s understandable to want to treat yourself – but keep it reasonable. After that, think about what’s best for your financial future.
- Make a Plan
When you file your returns, make a plan for your refund so you’ll be ready for your money when it arrives. Avoid sending your refund to your checking account, where your daily life expenses slowly drain your money. Separate it in a special account, preferably a savings account, until you can figure out how much you’re going to spend, save and put aside.
- Attack Credit Card Debt First
According to Experian, 2020 saw credit card delinquencies and utilization hit a 10-year low. That’s because more Americans used their stimulus checks to pay down credit-card debt instead of making new purchases. If you have credit card debt, there are few better ways to spend your refund. Paying down high balances on high-interest credit cards would be a great way to get a guaranteed return on the money.
- Tackle Installment Loans Next
If your credit cards are in good shape, the next best thing you can do is put your refund toward the principal on any installment loans. Even if you can’t pay off the whole thing, you’ll pay off your loan sooner and spend far less on interest over time. Installment loans include:
- Personal Loans
- Auto Loans
- Mortgage Loans
- Student Loans
- Start or Build an Emergency Fund
2020, if nothing else, was proof of the importance of having an emergency fund in case of the unexpected. Emergency funds should ideally be robust enough to cover 3-6 months’ worth of living expenses. If you don’t yet have an emergency fund, or your fund isn’t large enough to cover several months without a steady income, you may want to use some of your refund to build it up so you have a cushion to fall back on.
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- Fight the Urge To Splurge
Article inspired by gobankingrates.com.